TAX EQUITY DEVICES AND TAX RELIEF PROGRAMS€¦ · These fiscally stressed communities will become...

CHAPTER 14

GROWING SMARTSM LEGISLATIVE GUIDEBOOK, 2002 EDITION PAGE 14-1

TAX EQUITY DEVICES AND TAX RELIEF PROGRAMS

This Chapter discusses alternative approaches used to address fiscal disparity – differences inrevenue-raising capacity among local governments that are a product of the type of development thatoccurs. Two model statutes are presented: (1) regional tax-base sharing legislation, by which thegrowth in commercial, industrial, and high-value residential components of the regional propertytax base is shared among local governments; and (2) a statute permitting a voluntaryintergovernmental agreement among two or more units of local government to create a jointeconomic development zone. The contracting governments negotiate which public services andfacilities are to be provided in the area that is to be included in the zone, and which tax and otherrevenues that result from commercial, industrial, and other development will be shared, and in whatamounts or proportions.

The Chapter also contains model legislation for redevelopment, tax increment financing, and taxabatement. It includes a model law for designating agricultural districts, special areas wherecommercial agriculture is encouraged and protected. Land within such areas is then assessed at itsuse value in agriculture rather than its market or speculative value, a concept called “differentialassessment.” The Chapter concludes with a research note on public school finance and itsrelationship to planning and development. The note was prepared by Prof. Michael Addonizio ofWayne State University.

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Chapter Outline

REGIONAL [METROPOLITAN] TAX-BASE SHARING

14-101 Findings and Purpose14-102 Definitions14-103 Administering Fiscal Officer14-104 Assessed Valuation: Base Year and Subsequent Years14-105 Increases in Assessed Valuation of Commercial-Industrial Property; Computation

of Excess Residential Property14-106 Computation of Areawide Tax Base14-107 Distribution of Areawide Tax Base14-108 Taxable Value of Component Local Units: Local and Areawide14-109 Levies and Mill Rates: Local and Areawide 14-110 Miscellaneous Adjustments to Local and Areawide Rates and Levies14-111 Changes in Status of Qualifying Local Units14-112 Tax Collection and Disbursements to Qualifying Local Units14-113 Separability14-114 Effective Date

INTERGOVERNMENTAL AGREEMENTS

14-201 Joint Economic Development Zone

REDEVELOPMENT AND TAX RELIEF

14-301 Redevelopment Areas14-302 Tax Increment Financing14-303 Tax Abatement

AGRICULTURAL DISTRICTS

14-401 Agricultural Districts; Use Valuation of Agricultural Land

NOTE 14 – A NOTE ON ELEMENTARY AND SECONDARY PUBLIC SCHOOL FINANCE AND THEIR RELATION TO PLANNING

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Cross-References for Sections in Chapter 14

Section No. Cross-Reference to Section No.

14-102 14-103, 14-30214-105 14-10414-106 14-103, 14-104, 14-10514-109 14-107, 14-30214-112 14-107

14-301 7-303, 7-502, 8-103, 8-104, 8-701, 9-301, 9-501, 14-302, 14-30314-302 7-303, 8-103, 8-104, Ch. 10, 14-30114-303 7-207, 7-215, 7-303, 8-103, 8-104, 8-701, 9-301, 14-301

14-401 7-202, 7-212, 8-103, 8-104

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1See, e.g., Duane Windsor, Fiscal Zoning in Suburban Communities (Lexington, Mass.: Lexington Books,1979); B. Rolleston, “Determinants of Restrictive Suburban Zoning: An Empirical Analysis,” Journal of UrbanEconomics 221, no. 1, (1987): 1-21; M. Wasylenko,” Evidence of Fiscal Differentials and Intrametropolitan FirmRelocation,” Land Economics 56 (1980): 339-49; and Robert Cervero, “Jobs-Housing Balancing and Regional Mobility,”Journal of the American Planning Association 55, no. 2 (1989): 136-150.

2National Commission on Urban Problems, Building the American City (Washington, D.C.: U.S.G.P.O, 1968),19; see also Norman Williams, “The Three Systems of Land-Use Control,” Rutgers L.Rev. 25 (1970): 80-85 (discussionof impact of tax system on behavior of local governments in making land-use decisions).


TAX EQUITY AND ITS RELATIONSHIP TO PLANNING

THE PROBLEM: DISPARITY IN LOCAL REVENUE-RAISING CAPACITYLocal governments throughout the country rely on local property taxes and, in some states, local

income and sales taxes for revenues for their general operation. Therefore, it is understandable thatthe revenue-generating characteristics of land uses receive strong consideration in developmentdecisions. In many circumstances, these characteristics are driving factors behind the approvalprocess. Typically, in larger, older metropolitan areas with many local governments, reliance on alocal (as opposed to a regional) tax base has produced patterns of interregional polarization andsprawling, inefficient land use.

Because of location and/or the forces of metropolitan change, such as state investment decisionson such facilities as highway interchanges, some local governments are winners and others are loserswhen government services are tied to a local tax base. For example, if two local governments in aregion have exactly the same population, but one has extensive commercial, office, and industrialdevelopment, and the other residential development with some commercial uses, the lattergovernment will have to increase property taxes to obtain the same amount of revenue as the former.The differences in the revenue-raising capacity of local governments in a region to support basicservices is called “fiscal disparity.”

FISCAL ZONINGPrompted in part by fiscal concerns, local governments zone large tracts of land for commercial

and industrial use, whether or not there is a presently demand for such uses. The practice of usingthe zoning power to achieve fiscal objectives rather than purely land-use objectives is known as“fiscal zoning.” Each local government believes it is a candidate for a large manufacturing facility,a regional shopping center, or a “big box” retail store that would enhance its financial position,either through revenues from the property tax or sales tax (especially on “big ticket” items likeautomobiles). Under the fiscal zoning approach, local governments will exclude any proposeddevelopment that might create a net financial burden and will encourage development that promisesa net financial gain.1

A serious direct effect of fiscal zoning, according to one federal study, has been the “spate ofexclusionary practices relating to residential development.”2 Fiscal zoning results in efforts to keepout lower income groups, and especially large families. Low- and moderate-income housing

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3Id.

4For a summary of studies on fiscal disparity among local jurisdictions in the Chicago metropolitan area andVirginia, see R.S. Richman and M.H. Wilkinson, “Interlocal Revenue Sharing: Practice and Potential,” in Ideas andOptions 1, no. 1 (1993): 3-6, published by the National League of Cities.

5See Myron Orfield, Jr., “Tax Base-Sharing to Reduce Fiscal Disparities,” in Modernizing State PlanningStatutes: The Growing SmartSM Working Papers, Vol. 1, Planning Advisory Service Report No. 462/463 (Chicago:American Planning Association, March 1996 ), 167-170.

6Id.


produces relatively lower tax revenues in comparison to the services it requires. Consequently, localgovernments resist setting aside land for such uses.3

MISMATCH BETWEEN SOCIAL NEEDS AND LOCAL TAX RESOURCES “Fiscal disparity” is amplified through the process of metropolitan growth and change. The

concentration of poverty in central cities and older suburbs destabilizes schools and neighborhoods.This concentration and destabilization are exacerbated by increases in crime, and result in theexodus of middle-class families and businesses. As social service needs accelerate and theobligation to repair and replace infrastructure intensifies, the property tax base and other fiscalresources to support such services erode.4 In a related pattern, growing middle-income communities,dominated by smaller homes and apartments, develop without sufficient property tax base to supportschools and other public services. These fiscally stressed communities will become tomorrow'sdeclining inner-ring suburbs.

Upper-income suburbs at the metropolitan fringes are frequently the beneficiary of adisproportionate share of regional infrastructure expenditures in sewers, waterlines, and majorhighways, including interchanges. These suburbs capture new high-value businesses and residences.As their property tax expands, and their housing markets exclude all but high-cost residences, socialneeds decline proportionally.5

ENCOURAGEMENT OF SPRAWL As the waves of socioeconomic decline roll outward from the central cities and older suburbs,

tides of middle-class homeowners sweep into outlying communities where they find long commutesto employment centers. These growing, outlying communities often use restricted, low-densitysingle-family zoning to maintain a perceived quality of life. In so doing, they lock the region intolow-density development patterns that require extensive automobile travel, are difficult to serve withmass transit, cause air pollution, and supplant forest and farmland in the process.6

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7See, e.g., “Fresno County, Cities Fight Over Annexation,” California Planning & Development Report 4, no.8 (August 1989): 1, 4; Laurie Reynolds, “Rethinking Municipal Annexation Laws, Urban Lawyer 24, no. 2 (Spring1992): 249; and Lori A. Burkhart, “Municipal Annexation: An Update on Issues and Controversies,” Public UtilitiesFortnightly 127, no. 9 (May 1, 1991): 47.

8Norman Williams, Jr., “Halting the Race for ‘Good Ratables’ and Other Issues in Planning LegislationReform,” in Modernizing State Planning Statutes: The Growing SmartSM Working Papers, Vol. 1, Planning AdvisoryService Report No. 462/463 (Chicago: American Planning Association, March 1996 ), 58.

9Id.

10Minn. Stat. Ann. Ch. 473F (Metropolitan revenue distribution) (1994 and Cum. Supp. 1996).


COMPETITION FOR TAX BASE AND INTERGOVERNMENTAL TENSION Competition for tax base engenders intergovernmental conflict through pitched battles over

annexations and bidding wars for businesses that have already chosen to locate in a region. Localgovernments that want to grow attempt to annex unincorporated lands from the surrounding county.Neighboring municipalities may often compete with each other for the same piece of land. In someparts of the country, this competition has depleted the tax base of another governmental unit, suchas a township, as high-value land has been absorbed by the annexing municipal government.Developers benefit from this system as they can pit one local government against another bysearching for the most favorable terms, including public subsidies and a relaxation of land-usestandards. Tensions escalate among neighboring jurisdictions.7

The late Vermont Law School Professor Norman Williams, Jr., argued that statutory reformshould concentrate on “[r]emoving the presently dominant concern with encouraging good ratablesand discouraging bad ratables, so that public agencies can focus their attention clearly on otherplanning goals.”8 He added, “As long as we continue the present system of local real estate taxesto finance local public services, it will not really matter how many other innovative ideas areintroduced; there will be no substantial change in how the system actually works.”9

APPROACHES TO ADDRESS METROPOLITAN TAX EQUITYTwo approaches have emerged over the past several decades to address metropolitan tax equity

issues.

(1) Tax-base-sharing legislation. Two regions in the U.S. have specialized legislation thatshares revenues from real property taxes: the Twin Cities metropolitan area in Minnesota and theHackensack Meadowlands area in New Jersey.

Twin Cities. Regional tax-base sharing was implemented in the seven-county Twin Cities areain Minnesota with the passage of the Minnesota Fiscal Disparities Act in 1971.10 Under thisprogram, each city contributes 40 percent of the growth of its commercial-industrial tax baseacquired after 1971 to a regional pool. The value of properties in the regional pool is taxed at aweighted areawide rate. Funds from this areawide pool are distributed via an allocation formula that

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11Studies or commentaries on the Twin Cities tax-base-sharing system include: Gary T. Johnson, “Tax BaseSharing and Fiscal Disparities: A Retrospective,” Municipal Management (Fall 1984): 67-72; Katharine C. Lyall,“Regional Tax Base Sharing – Nature and Potential for Success” in Robert W. Burchell and David Listokin, Cities UnderStress (Piscataway, N.J.: Rutgers University Center for Urban Policy Research, 1981), 493-500; Katharine C. Lyall,“Tax-Base Sharing: A Fiscal Aid Toward More Rational Land Use Planning,” Journal of the American Institute ofPlanners 41, no. 2 (1975): 90-100; Note, “Minnesota’s Metropolitan Fiscal Disparities Act – An Experiment in Tax BaseSharing,” Minnesota L. Rev. 59 (1975): 927-963; Andrew Reschovsky and Eugene Knaff, “Tax Base Sharing: AnAssessment of the Minnesota Experience,” Journal of the American Institute of Planners. 43, no. 4 (1977): 361-370;Charles R. Weaver, “The Minnesota Approach to Solving Urban Fiscal Disparity,” State Government XLV (Spring1972): 100-105; and John W. Windhorst, “The Minnesota Fiscal Disparities Law,” Land Use Law and Zoning Digest28, no. 4 (1976): 7-12. See also W. Patrick Beaton, “Regional Tax Base Sharing: Problems in the Distribution Function,”in Robert W. Burchell and David Listokin, Cities Under Stress (Piscataway, N.J.: Rutgers University Center for UrbanPolicy Research, 1981), 501-526; D.A. Gilbert, “Property Tax Base Sharing: An Answer to Central City FiscalProblems,” Social Science Quarterly 59, no. 4 (1979): 681-689; and Walter Vogt, “Tax Base Sharing: Implications fromSan Diego County,” Journal of the American Planning Association 45, no. 2 (1979): 134-142.

12Myron Orfield, Jr., “Tax Base Sharing to Reduce Fiscal Disparities” in Modernizing State Planning Statutes:The Growing SmartSM Working Papers, Vol. 1, Planning Advisory Service Report No. 462/463 (Chicago: AmericanPlanning Association, March 1996), 169.

13Burnsville v. Onischuk, 301 Minn. 137, 22 N.W.2d 523 (1974), cert. denied, 420 U.S. 916 (1974).

14The distribution formula itself has been the subject of some academic criticism on the grounds that if it weremodified to take into account size of the population below the poverty level, the existence of special needs populations,and factors such as the age of the housing stock, the allocation to individual communities would be based on a moreprecise definition of need. See Gary T. Johnson, “Tax Base Sharing and Fiscal Disparities: A Retrospective,” MunicipalManagement (Fall 1984): 70, citing Andrew Reschovsky and Eugene Knaff, “Tax Base Sharing: An Assessment of theMinnesota Experience,” Journal of the American Institute of Planners 43, no. 4 (1977): 67; and D.A. Gilbert, “PropertyTax Base Sharing: An Answer to Central City Fiscal Problems,” Social Science Quarterly 59, no. 4 (1979): 684.


takes into account a local government’s population and fiscal capacity (defined as per capita realproperty valuation). The Twin Cities system has been widely analyzed in the literature of law,planning, and economics.11

According to Minnesota State Representative Myron Orfield, Jr., the present system has reducedtax-base disparities on a regional level from 50:1 to roughly 12:1. As of 1994, about $393 million,or about 20 percent of the property tax base, was shared regionally.12 The system has survived acourt test on its constitutionality13 as well as an attempt to repeal it. It should be noted, for severalreasons, that the Twin Cities system does not completely eliminate or solve the problem of fiscaldisparity. For example, the system does not retroactively redistribute property tax revenuesresulting from the existing tax base in 1971. In addition, the areawide pool of commercial andindustrial property growth is not the result of an even split, but one in which 60 percent of thegrowth goes to the local government and the remainder to the pool. Also, the program does notgenerate wealth but instead redistributes it.14 Communities that have the least growth in tax baseand the lowest per capita commercial and industrial values are the biggest beneficiaries from the

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15R.S. Richman and M.H. Wilkinson, “Interlocal Revenue Sharing: Practice and Potential,” 9.

16The legislation authorizing the Hackensack Meadowlands Commission appears at N.J.S.A. §§13:17-60 to13:17-76.

17Id., §13-17-67.


Here’s what Minnesota State Representative Myron Orfield,Jr., says about potential support for regional tax-basesharing elsewhere in the U.S.:

There is a broadly shared belief that tax-base sharing cameout of some cosmic consensualism in progressive Minnesota thatcannot be duplicated elsewhere in the nation. This is not true. Tax-base sharing in Minnesota has always beencontroversial. Many suburban governments at first feared lossof tax base and local control. But wise leaders realized the highdegree to which property wealth was concentrated anddeveloped computer runs that showed the projected amount oftax base cities would actually gain. Most of the inner and developing middle-class suburbs werepotential recipients. When these suburbs realized that tax-basesharing was likely to increase substantially their tax base andstabilize their future fiscal situation, they became supporters. Asone legislator put it: “Before the runs, tax-base sharing wascommunism. Afterwards, it was ‘pretty good policy.’”

Can Tax-Base Sharing be Duplicated Elsewhere?

program. Communities with higher-than-average per capita fiscal capacity generally receive asmaller share than they havecontributed.15

Hackensack Meadowlands, N.J.Special tax-base-sharing legislationwas adopted by the New Jersey leg-islature in 1968 for the HackensackMeadowlands District, located nearthe New York metropolitan region.The Meadowlands is composedprimarily of wetlands and extensiveareas of marshland adjacent tointensive development. Throughthe adoption and administration ofa comprehensive management plan,the Hackensack MeadowlandsDevelopment Commission overseesdevelopment in the district.16

Fourteen communities that haveproperty partially included withinthe district participate in the inter-municipal revenue-sharing plan.The plan’s intent was to com-pensate those municipalities for thefiscal impact of land-use decisionsmade by the commission. Eachmunicipality contributes to an “intermunicipal account” in an amount equal to a percentage ofincreases in assessed valuation of property within the district, starting from the base year of 1970.The annual contribution is based on determinations of: the increase of true value of real propertyin the district since the base year; the total effective tax rate applicable to that property; and thepercentage of the tax rate attributable to the municipality after the county portion is extracted.17

Payments from the account are made on the basis of a municipality’s portion of the total land area

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18The statute calls this an “apportionment payment.” Id. §13:17-72.

19The statute provides for “guarantee payments” to compensate for exempt property and for “service payments”to schools. Id., §§13:17-68,- 70.


21Code of Va. §15-1-1167.1.2 (1994).


in the district.18 Municipalities may also receive compensation from the fund when land is removedfrom the local tax rolls for a public purpose (e.g., a park) or when new development stimulatesgrowth in school enrollment to compensate for increased educational costs.19 One assessment of theprogram described its impact as follows:

The New Jersey tax-sharing program appears to have evolved essentially as an intergovern-mental revenue transfer mechanism. In 1991, total contributions and disbursements underthe program equaled $4.67 million for all participating localities. Exclusive of retroactiveadjustments for prior years, only two jurisdictions made net contribution to theintermunicipal account in excess of $1 million – Secaucus ($2.81 million) and North Bergen($1.42 million) – while only one received a payment of more than that amount from the fund– Kearny ($2.72 million). Of the remaining localities, one was a net contributor or recipientof more than $500 thousand.20

(2) Interlocal revenue-sharing agreements. A number of states have special legislationauthorizing local governments to enter into interlocal agreements to share revenues fromdevelopment. These are intended to encourage intergovernmental cooperation and forestall attemptsby cities to annex unincorporated territory. The legislation may authorize sharing of various typesof tax revenues, including property, local income, and local sales taxes.

Virginia. One of the best known interlocal revenue-sharing statutes is Virginia’s. Under Chapter26.1:1 of the Code of Virginia, counties, cities, and towns may enter into voluntary agreements tosettle annexation and related issues. The statute provides that the agreement may include:

fiscal arrangements, land use arrangements, zoning arrangements, subdivision arrangementsand arrangements for infrastructure, revenue and economic growth sharing, dedication of allor any portion of tax revenues to a revenue and growth sharing account, boundary lineadjustments, acquisition of real property and buildings, and the joint exercise or delegationof powers as well as the modification or waiver of specific annexation, transition orimmunity rights as determined by the local governing body.21

The statute requires that the agreements be reviewed by the state’s commission on localgovernment, which must hold a public hearing on it, and then make an advisory recommendationto a special court and to the affected local governments. Prior to court action on the agreement, theaffected local governments must each hold a public hearing and adopt by ordinance the original ormodified agreement. The court may then affirm or reject the agreement. Upon affirmation of the

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22Id., §§15-1-1167.1.3-6 (1994).

23R.S. Richman and M.H. Wilkinson, “Interlocal Revenue Sharing: Practice and Potential,” 11-23; see also GaryT. Johnson, “Tax-Sharing as an Alternative to Annexation: A Virginia Case Study,” Urban Law and Policy 7 (1985):243-254 (1985) (discussion of City of Charlottesville/Albermarle County agreement).

24According to an analysis by Virginia Commonwealth University Professor Gary T. Johnson, the agreementprovided for five distinct interrelated steps to distribute the fund:

First, population indices are calculated by dividing each locality’s population by the combinedpopulations of both jurisdictions. Second, “relative tax effort” indices are calculated by dividing eachjurisdictions true real property tax rate by the combined true real property tax rates of the twocommunities. Third, a composite index for each community is computed by averaging these twoindices. Fourth, each jurisdiction’s share of the fund is calculated by multiplying the community’scomposite index by the fund itself. Finally, net transfers of wealth are obtained by subtracting eachlocality’s share of the fund from [its] contributions to it.

Id., 248.

25Id., citing “Annexation and Revenue Sharing Agreement of February 17, 1982,” Section III (Charlottesville,Va. 1982), 6.


agreement by the court, it becomes binding on the future governing bodies of participatingjurisdictions.22

A number of cities and counties in Virginia have used the voluntary agreement, including theCity of Charlottesville and surrounding Albermarle County, the City of Lexington and surroundingRockbridge County, the City of Franklin and surrounding Southampton County, and the City ofFranklin and Isle of Wight County.23 Under the Charlottesville/Albermarle agreement, for example,the city and the county agreed to share property tax revenue in lieu of a proposed annexation. In a1982 agreement, the city and the county established a revenue-sharing fund to which both entitiescontribute. The contributions to the fund were negotiated, with each jurisdiction’s contribution tothe fund being 37 cents per $100 of assessed valuation.24

Under the agreement, the city decided not to initiate annexation procedures against the countyand not to support any annexations initiated by private property owners. Moreover, the agreementprovides:

[E]xcept for ad valorem property taxes, taxes on restaurant meals, transient lodgings oradmission to public places or events and other general or selective sales or excise taxes,neither jurisdiction will . . . impose or increase any tax that would affect residents of theother jurisdiction if the other jurisdiction is not legally empowered to enact that tax at thesame rate and in the same manner.25

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26Ohio Rev. Code §715.69 (1995).

27Ohio Rev. Code §§715.70 to 715.71 (1995).


29Office of Strategic Research, Ohio Department of Development, Joint Economic Development Districts(Columbus, Oh.: ODOD, December 1995). This report includes executive summaries of the Akron joint economicdevelopment district contracts.


Approach Use When There Is

Regional Tax-Base Widespread agreement inSharing a region that

communities need towork together to support sensible development patterns andreduce fiscal disparity

Intergovernmental A desire among localRevenue-Sharing governments forAgreements flexibility to negotiate

special agreements withterms and conditions thatare specific to their ownsets of problems, interests, and capabilities for a subsection of the region

Approaches to Ensure Tax Equity

Ohio. Ohio statutes authorize municipalities to establish “joint economic development zones”26

and municipalities and townships to establish “joint economic development districts.”27 A numberof Ohio jurisdictions have taken advantage of the program, including the cities of Barberton andNorton,28 the City of Springfield and Green Township in Clark County (for property surroundinga municipally owned airpark), and the City of Akron and Coventry, Springfield, and CopleyTownships in Summit County.29 The advantage of the municipal/township joint economicdevelopment district is that it allows theimposition of an income tax on individualsliving or working in the district and on the netprofits of businesses in the district. This is apower that, in Ohio, is otherwise granted onlyto municipalities and not to townships orcounties that have jurisdiction overunincorporated areas. The district’s board ofdirectors, composed of elected members of thelegislative bodies and the elected chiefexecutive officers of the contracting bodies,levy the income tax, subject to a vote by theelectors of the district.

Montgomery County, Ohio. Although notthe creature of special state legislation, avolun-tary effort has been instituted forcommunities in the Montgomery County( D a y t o n ) , O h i o , E c o n o m i cDevelopment/Governmental Equity (ED/GE).The program consists of two sep-arate, relatedfunds administered by the county. T h eEconomic Development (ED) Fund distributesapproximately $5 million per year of countysales tax revenue to finance economicdevelopment projects submitted to the county.

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30Montgomery County, Ohio, Summary of 1995 Economic Development/Governmental Equity (ED/GE)Program (Dayton, Oh.: Montgomery County, 1995); William J. Pammer, Jr., and Jack L. Dustin, “Fostering EconomicDevelopment through County Tax Sharing,” State and Local Government Review 25, no. 1 (Winter 1993): 57-69 (thisarticle includes an extensive discussion of the development of the contribution and distribution formulas); AnnSchenking, “Economic Development/Governmental Equity Program: Providing a Competitive Edge for MontgomeryCounty, Ohio,” Economic Development Commentary 19, no. 3 (Fall 1995): 18-24; and Jack L. Dustin, CooperativeCommunities – Competitive Communities: The Role of Interlocal Tax Revenue Sharing, Ohio Task Force onCompetitiveness and Cooperation Monograph Series (Dayton, Ohio: Wright State University Center for Urban andPublic Affairs, 1994).

31Colo. Rev. Stat. Ann. §29-1-203 (West 1989); K.R.S. §§ 65.210 to 65.300 (1995); K.R.S. 65.245 specificallyauthorizes cooperative interlocal agreements for the sharing of revenues; and Mich. Comp. Laws. §§ 124.501 to 124.512(1991). Mich. Comp. Laws §124.505 authorizes interlocal agreements for sharing revenues and for the benefit of localgovernment units; see also R.S. Richman and M.H. Wilkinson, “Interlocal Revenue Sharing: Practice and Potential,”26-27 (discussing an interlocal revenue-sharing and development regulation agreement between the cities of Westminsterand Thornton, Colorado, and a joint economic development agreement between the cities of Detroit and Hamtramck,Michigan).


Monies from the ED fund are awarded on a competitive basis through the application of selectioncriteria to individual projects.

Annually, through the Governmental Equity (GE) Fund, a portion of increased property andincome taxes collected as a result of economic growth of participating cities, villages, and townshipsin the county, is also shared with participants in the program. The distribution formula is made toeach jurisdiction, based on its share of the total population of all participating jurisdictions. The twofunds are intended to promote local and regional economic development objectives. Localgovernments that participate in the program sign a 10-year agreement with the county.30

Other states. Colorado, Kentucky, and Michigan have legislation authorizing voluntary revenue-sharing agreements; a number of local governments in those states have taken advantage of thesestatutes.31 Intergovernmental agreements can offer local governments extraordinary flexibility indevising revenue-sharing arrangements. Like tax-base sharing, they will not completely remedy theproblem of fiscal disparity and winner-take-all competition for tax base. However, they can lessenthese problems and reduce tension among governmental units, especially those problems related toannexation. Still, they require diplomacy in their negotiation and a very good technical grasp of theeconomic, infrastructure, and planning issues affecting the jurisdictions entering into the agreement.

REGIONAL [METROPOLITAN] TAX-BASE SHARING

Commentary: Regional [Metropolitan] Tax-Base Sharing

The following model legislation authorizes regional or metropolitan property tax base sharing. In adapting the model, a state legislature has several policy choices:

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‚ A state legislature can choose among two tax bases to share, selecting either or both thecommercial-industrial tax base, which is the base used in the Minnesota Fiscal Disparities Act,or the excess residential property tax base. This latter tax base is that portion of the single-familyresidential property valued in excess of an amount specified in the statute (say, $150,000 or$200,000) or tied to a multiplier (say, 150 to 200 percent) of the average value of a single-familyresidence in the region. Use of the excess residential property tax base would redistributerevenues from those communities that have homes that are valued significantly more than typicalhomes in the region. The statutory floor on high-value, single-family property, when the amountis specified in the statute, must periodically be changed to reflect the impact of inflation on theregion.

‚ A state legislature can choose among a range of percentages for the commercial-industrial taxbase. Under the formula, a percentage of the growth in the commercial-industrial tax base isshared, starting from a base year to the current year. In the Twin Cities model, 40 percent of thegrowth goes into an areawide pool. In the following model, in Section 14-106, several alternatepercentages (25, 40, or 50 percent) can be applied to determine which proportion is allocated forthe areawide pool.

‚ A state legislature can choose from two methods for calculating the fiscal capacity of a localgovernmental unit: (1) the total property valuation of the unit divided by the total population; or(2) the total property valuation plus the total personal income received by residents of the unitdivided by the total population of the unit.

Determining each community’s contribution and share of the areawide tax base is one of the mostdifficult aspects of the model legislation to understand. Below are examples of typical calculationsthat demonstrate how contributions and shares are calculated.

CONTRIBUTIONSCommercial-industrial property. Assume that the regional tax base is 50 percent of the growth

of commercial and industrial property valuation from a base year to a current year. Between thebase year and year 5 of the program, the equalized assessed commercial-industrial valuation in acommunity grows by $5,000,000. Under the formula, 50 percent (or $2,500,000) of this valuewould represent that portion of the community’s commercial-industrial tax base that wouldconstitute the community’s portion of the areawide tax base. If there were 25 communities in theregion, the total commercial-industrial areawide tax base would be the product of each community’sportion of the areawide tax base, times 25. (See Sections 14-105 and 14-106 of the model below.)If a community had no growth in its commercial-industrial property tax base, it would contributenothing to the areawide tax base pool.

Excess residential value. If a community of 1,500 residences (both multi- and single-family) has200 single-family homes with an average value of $250,000 each, and the floor on the excessresidential property tax base is $200,000, $10 million (200 x ($250,000-$200,000)) would be subject

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to sharing (this assumes the added increment in residential value over the floor of $200,000 is allgrowth from a base year). The “excess residential contribution percentage” is determined bydividing the amount subject to sharing (i.e., $10 million) by $50 million (i.e., the total average valueof single-family homes in the community – 200 x $250,000), or 20 percent. (See Section 14-106,Computation of Areawide Tax Base.) If a community had no homes valued in excess of $200,000apiece, it would contribute nothing to the areawide tax base.

Applicable Tax Rate. Under the model, the community’s tax rate is calculated from the dollaramount to be levied on the taxable value of that community. The community’s tax rate on the sharedtax base (commercial-industrial, excess residential, or both) will be the weighted average of all unitsof government in the region. (See Section 14-109, Levies and Mill Rates: Local and Areawide.)Consequently, a piece of property that is commercial or industrial land use will have two tax rates:(1) a local tax rate applied to the part of its value that remains local; and (2) an areawide tax rateapplied to the part of its value that makes up the areawide tax base. Similarly, a single-family housewhose value is in excess of the statutory floor will have two tax rates applied to the property: (1) alocal rate on the portion at or below the statutory floor; and (2) an areawide rate for all value inexcess of the statutory floor.

DISTRIBUTION OF REVENUES FROM AREAWIDE BASEIn order to compute each community’s share of revenues from the areawide tax base, two

calculations are made (see Section 14-107, Distribution of Areawide Tax Base).

Calculation of a distribution index. A local governmental unit’s distribution index is calculatedas follows:

Unit Distribution Index = Population of Unit x (Average Fiscal Capacity/ FiscalCapacity of Unit)

“Fiscal capacity” is either the total property valuation of the community divided by its population,or the total property valuation, plus the sum of income received by residents of the unit, divided bythe population of the unit. “Average fiscal capacity” is the sum of property tax bases (and ofpersonal income of all qualifying units, where this is included), divided by the sum of theirpopulations, as of a date in the same year.

Calculation of distribution value. To determine the share (“distribution value”) of the areawidetax base, the areawide tax base is multiplied by the proportion of each local governmental unit’sdistribution index over the sum of the indices for all units. The resulting figure is the areawide taxbase for any give year that is attributable to any particular unit.

Unit Distribution Value = Areawide Tax Base x (Unit Distribution Index/Sum of Distribution Indices for all Units)

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32This example is adapted from Mary E. Brooks, “Minnesota’s Fiscal Disparities Bill,” PAS Memo No. 9(Chicago, Ill.: American Society of Planning Officials, 1972), 3.


SAMPLE CALCULATION32

To understand how the formulas work, it is useful to plug figures into the sample calculations.Using Communities X, Y, and Z, which are “qualifying local units” eligible to participate in the taxbase sharing program under the model legislation, the following examples illustrate how theformulas operate with varying per capita valuation or fiscal capacity (with or without personalincome included) and when the population differs. The areawide tax base described below caninclude the excess residential value growth component as well as the commercial-industrial growthcomponent.

Community Population Per CapitaValuation/Fiscal Capacity

X (low population, highvaluation)

20,000 $200,000

Y (low population, lowvaluation)

20,000 $20,000

Z (high population, lowvaluation)

40,000 $20,000

Areawide tax base = $1,000,000Areawide population = 100,000Total valuation for all communities = $100,000,000Sum of distribution indices for all communities = 200,000,000

Community X

Distribution index = 20,000 x (($100,000,000/100,000)/($200,000/20,000)) =2,000,000

Areawide tax base = $1,000,000 x (2,000,000/200,000,000) = $10,000 (the share ofthe areawide tax base for Community X)

Community Y


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33The model legislation in Section 14-101 et seq. was drafted by the Hon. Myron Or field, Jr., a Minneapolisattorney who is a state representative in Minnesota. It is based on the Twin Cities tax-base-sharing statute as well asa model published by the U.S. Advisory Commission on Intergovernment Relations (ACIR), “Metropolitan Tax BaseAct,” Bill No. 3.108 (Washington, D.C.: ACIR, 1984).


Areawide tax base = $1,000,000 x (20,000,000/200,000,000) = $100,000 (the shareof the areawide tax base for Community Y)

Community Z


Areawide tax base = $1,000,000 x (80,000,000/200,000,000) = $400,000 (the shareof the areawide tax base for Community Z)

14-101 Findings and Purpose33

(1) The [legislature] finds that [certain of the] metropolitan areas of the state are confronted withincreasing social and economic polarization and wasteful sprawling development patterns.In these areas:

(a) poverty concentrates and social and economic needs grow in the central cities andolder suburban communities, with older suburban areas having less resistance tothese trends than central cities;

(b) certain suburbs are developing at the edges of regions but with insufficient propertytax bases to support local services;

(c) in these central cities, older suburbs, and developing suburban areas with low taxbases, where the majority of the region’s social needs are located, there is acomparatively small per capita property tax base that is slow growing, stagnant, ordeclining;

(d) other developing suburbs constitute a special sector of the region that dominatesregional economic growth, has highly restrictive housing markets, receives adisproportionate share of local infrastructure investment, has an insufficient numberof workers for local jobs, and experiences local congestion problems that cannot besolved by adding new highway capacity;

(e) in this special sector, the large per capita property tax base grows very rapidly in theface of slow-growing, stable, or declining social needs in the sector; and

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(f) as a consequence, the region polarizes socially and economically, with oldercommunities experiencing decline through flight of their population base, and thecompetition for property tax base inducing growing fiscal inequity and sprawlingwasteful development patterns.

(2) The [legislature] further finds that tax-base sharing:

(a) creates greater equity among communities;

(b) breaks the intensifying mismatch between local needs and communities’ tax bases;

(c) removes local economic incentives underlying exclusivefiscal zoning;

(d) reduces the interregional competition for a tax base; and

(e) facilitates regional land-use planning efforts.

14-102 Definitions

(1) “Administering Fiscal Officer” means the [state director of finance or fiscal officer of acounty selected pursuant to Section [14-103] below or fiscal officer chosen by the governingboard of the council of governments or other regional body comprising the principal unitsof general government in the area].

(2) “Area” means a metropolitan area as defined by the most recent publication of the UnitedStates Bureau of the Census and the Office of Management and Budget [or such otherdefinition as the state may prefer].

(3) “Average Fiscal Capacity” means the sum of the property tax bases [and of the personalincome bases] of all qualifying local units in the area as of a particular date, divided by thesum of their populations, as of a date in the same year.

(4) “Commercial-Industrial Property” means the categories of property set forth in [citestatute defining this class of property], excluding that portion of such property which: (i)constitutes the tax base for a tax increment pledged pursuant to Section [14-302],certification of which was requested prior to the effective date of this Act, to the extent andso long as such tax increment is so pledged; (ii) may, by law, constitute the tax base for taxrevenues set aside and paid over for credit to a sinking fund pursuant to the direction of thegoverning body of a unit of local government in accordance with [statute providing for localdebt retirement through a sinking fund procedure], to the extent that such revenues are sotreated in any year; or (iii) is exempt from taxation pursuant to [cite statute, if any,mandating or authorizing the exemption of any types of commercial-industrial or ad valoremtaxes]. [Insert any other additions to or exclusions from the statutory definition ofcommercial-industrial property that are desired for purposes of this Act].

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34This figure can instead be tied to some value that is a multiplier of the average value of a single-family homein the region or metropolitan area. For example, if the average value of a single-family home in a given tax year is$100,000, the definition of “excess residential property” could be 150 percent ($150,000) or 200 percent ($200,000)of the average value. Using this approach would require that the average value be calculated each year but wouldeliminate the need to change the amount in the statute.

35Qualifying local units should be chosen so that they will cover the entire area, with no overlap, and wherestandard demographic information, such as population, is readily available for each unit. Generally, counties ormunicipalities could be used, but not both. If municipalities are used, but there are unincorporated places within the area,those places should also be treated as qualifying units. Where a population threshold is used for qualifying local units,it would be equivalent to assigning those units that fall below the threshold a contribution value and distribution valueequal to zero.


(5) “Component Local Unit” means any [county, municipality, village, town, township], schooldistrict, or other special service district authorized to impose ad valorem taxes oncommercial, industrial, or residential property, located wholly or partly within the area.

(6) “Contribution Value” means the value of that portion of the commercial-industrial and theexcess residential property tax base transferred from local to areawide taxability.

(7) “County or Municipal Fiscal Officer” means the principal financial official of a county ormunicipal government, such as an auditor, treasurer, or director of finance.

(8) “Distribution Value” means the value to a qualifying local unit of its share of the areawideproperty tax base.

(9) “Excess Residential Property” means that portion of a component local unit’s tax base thatexists in the portion of [single-family homestead] residential property valued in excess of[$150,000 or $200,000].34

(10) “Fiscal Capacity” of a qualifying local unit means the [sum of income received by theresidents of the unit and the] property tax base of such unit divided by the population of theunit.

(11) “Income” means the total money from all sources as reported by the U.S. Department ofCommerce Bureau of the Census [or the latest official state estimate of income] for generalstatistical purposes.

(12) “Levy” means the amount certified to the county or municipal fiscal officer as beingnecessary to be derived from property taxation in a forthcoming year or which has beenderived from that source in preceding years.

(13) “Qualifying Local Unit” means any component [county, municipality, town, township, orvillage] with a population of [1,000 or more] that is to share in that portion of the tax basetransferred from local to areawide taxability.35

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(14) “Population” means the most recent estimate of the population of qualifying local units inthe area made by the [U.S. Census Bureau or state agency or the regional planning or otheragency that embraces the particular metropolitan area].

(15) “Property Tax Base” means the full value of taxable property as equalized for state taxpurposes by the [department of revenue or other state agency charged with equalizingproperty tax assessments among local governments].

14-103 Administering Fiscal Officer

[(1) The director of the state [department of finance or other appropriate state agency] shallserve as the administering fiscal officer and shall discharge the duties imposed upon him orher by this Act].

[or]

[(1) On or before [date following the effective date of this Act] and every [2] years thereafter, thefiscal officers of the counties and of the [municipalities] of [25,000] population and overwithin the area shall meet at the call of the fiscal officer of [county in which the largest cityof the area is located] and shall elect from among their number a fiscal officer to serve asthe administering fiscal officer for the tax base sharing plan [for a period of 2 years or untilsuch time as a successor is chosen in the same manner as just described]. If a majority isunable to agree on a person to serve as administering fiscal officer, the state [director offinance] shall appoint such a person from among the group of county and municipal fiscalofficers in the area. If the administering fiscal officer ceases to serve as a county ormunicipal fiscal officer within the area [during the term for which he or she was elected orappointed], a successor shall be chosen in the same manner as is provided for the originalselection [to serve for the unexpired term]].

(2) To perform the functions imposed by this Act, the administering fiscal officer shall use thestaff and facilities of the fiscal office of the county or municipality in which he or she serves.The administering fiscal officer’s county or municipality shall be reimbursed for themarginal expenses incurred hereunder by the administering fiscal officer and staff througha contribution from each of the other qualifying local units in the area in an amount thatbears the same proportion to the total expense as the population of the respective other unitsbears to the total population of the area. The administering fiscal officer shall annually, onor before [date], certify the amounts of total expenses for the preceding calendar year andthe share of each unit, to [the [treasurer] of] each other unit. Payment shall be made by [the[treasurer] of] each unit to the unit incurring the expenses on or before the succeeding [date].

[or]

(2) [In the event that the state fiscal agency administers and maintains the accounts for the tax-base sharing plan or for a plan in each of two or more metropolitan areas, insert a

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provision here for a pro-rata contribution or other arrangement to cover operating expensesconsidered necessary.]

14-104 Assessed Valuation: Base Year and Subsequent Years

(1) On or before [date consistent with beginning date of the tax-base-sharing program], eachqualifying local unit’s [county assessor] shall separately determine and certify to theadministering fiscal officer the [equalized] assessed valuation for the year [19-- or 20--] ofcommercial-industrial and of excess residential property subject to taxation within the unit.The administering fiscal officer shall request of the [state department of revenue or stateequalization agency] a similar tabulation of state-equalized assessments of such property andshall provide to the governing body of each qualifying local unit and make available to thepublic a tabulation of [state-equalized] valuations of commercial-industrial and excessresidential property for the area as a whole. The initial year covered by the foregoingvaluations shall be the base year against which subsequent changes in commercial-industrialand excess residential property tax bases shall be calculated.

(2) On or before [month, day] of each subsequent year, each qualifying local unit’s [countyassessor] shall determine, certify, and provide to the administering fiscal officer the assessedvaluation of commercial-industrial and excess residential property in the form described inparagraph (1) above, and the administering fiscal officer shall obtain, tabulate, and publishin the same manner and composition as above the [state-equalized] valuations of suchproperty.

14-105 Increases in Assessed Valuation of Commercial-Industrial Property; Computation of ExcessResidential Property

(1) On or before [2 years following the effective date of this Act], the county fiscal officer ofeach qualifying local unit shall determine the amount, if any, by which the equalizedassessed valuation determined pursuant to Section [14-104] above, of commercial-industrialproperty subject to taxation within each unit in his or her county exceeds the assessedvaluation in [insert base year] of commercial-industrial property subject to taxation withinthat county. On or before [2 years following the effective date of this Act], the county fiscalofficer of each qualifying local unit shall determine the amount, if any, by which theequalized assessed valuation determined pursuant to Section [14-104] above, of excessresidential property subject to taxation within each unit in his or her county exceeds theassessed valuation in [insert base year] of excess residential property subject to taxationwithin that county.

(2) The increases in assessed value determined by this Section shall be reduced by the amountof any decreases in the assessed valuation of commercial-industrial and excess residentialproperty resulting from any court decisions, court-related stipulation agreements, orabatements for a prior year, and only the amount of such decreases made during the 12-month period ending on [date] of the current assessment year, where such decreases, iforiginally reflected in the determination of a prior year’s [equalized] assessed valuation

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under Section [14-104], would have resulted in a smaller base contribution from thecomponent local unit in that year. An adjustment for such decreases shall be made only ifthe unit made a contribution in a prior year based on the higher valuation of the commercial-industrial and excess residential property.

14-106 Computation of Areawide Tax Base

(1) Each county fiscal officer shall certify the equalized assessed valuations and increase thereof,pursuant to Sections [14-103] and [14-104] above, separately for both commercial-industrialand excess residential property to the administering fiscal officer on or before [date] of eachyear. The administering fiscal officer shall multiply the commercial-industrial componentcertified pursuant to Section [14-105]] by [.25 or .40 or .50], and shall add the resultingproduct to the excess residential growth component certified pursuant to Section [14-105].The resulting amount shall be known as the “areawide tax base for (year).”

(2) For each qualifying local unit, a “commercial-industrial contribution percentage” shall becomputed as the commercial-industrial value determined in paragraph (1) above divided bythe total commercial-industrial value of the qualifying local unit. For each qualifying localunit, an “excess residential contribution percentage” shall be computed as the excessresidential value determined in paragraph (1) above, divided by the total excess residentialvalue of the qualifying local unit.

14-107 Distribution of Areawide Tax Base

(1) The state [commissioner of revenue] shall certify to the administering fiscal officer on orabout [date] of each year, the population of each qualifying local unit, the average fiscalcapacity, and the fiscal capacity of each individual qualifying local unit.

(2) The administering fiscal officer shall determine for each qualifying local unit the product of:(a) its population, and (b) the proportion that the respective average fiscal capacity bears tothe fiscal capacity of that qualifying local unit. The product shall be the areawide tax basedistribution index for that qualifying local unit, provided that if a qualifying local unit islocated partly within and without the area, its index shall be that which is otherwisedetermined hereunder, multiplied by the proportion that its population residing within anarea bears to its total population as of the preceding year.

(3) The administering fiscal officer shall determine the proportion that the index of eachqualifying unit bears to the sum of the indices of all qualifying local unit(s). In the case ofeach qualifying local unit, the administering fiscal officer shall then multiply this proportionby the areawide tax base.

(4) The product of the multiplication prescribed by paragraph (3) above shall be known as the“distribution value for (year) attributable to [name of qualifying local unit].” Theadministering fiscal officer shall certify such product to the fiscal officer of the county inwhich the qualifying local unit or units are located on or before [date].

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(5) The distribution value attributable to each qualifying local unit shall be apportioned amongall component local units exercising taxing authority within the qualifying local unit on thebasis of the percentage of the qualifying local unit’s residential property tax base lying withthe component local unit.

14-108 Taxable Value of Component Local Units: Local and Areawide

(1) Each county fiscal officer shall determine the taxable value of each component local unitwithin the county in the manner hereby prescribed. The taxable value of a component localunit is its assessed valuation, as determined in accordance with other provisions of law,subject to the following adjustments:

(a) there shall be subtracted from its assessed valuation, in each qualifying local unit inwhich the component local unit exercises ad valorem taxing jurisdiction, an amountequal to the qualifying local unit’s commercial-industrial contribution percentagetimes the value of commercial-industrial property, and an amount equal to thequalifying local unit’s excess residential contribution percentage, times the value ofexcess residential property; and

(b) there shall be added to the assessed valuation of each component local unit thedistribution value apportioned to it under paragraph (5) of Section [14-107], fromeach qualifying local unit in which it exercises taxing authority.

(2) This net resulting from the subtraction specified in subparagraph (a) and the additionspecified in subparagraph (b) of paragraph (1) above represents the final assessment valuefor determining the tax rate for each component local unit.

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14-109 Levies and Mill Rates: Local and Areawide

(1) On or before [month, day, and year] and each subsequent year, the county fiscal officer shallapportion the levy of each component local unit in his or her county in the manner prescribedas follows:

(a) determine the areawide portion of the levy for each component local unit bymultiplying the mill rate of the unit, times the distribution value apportioned to itunder paragraph (5) of Section [14-107] above; and

(b) determine the local portion of the current year’s levy by subtracting the areawideportion determined above from the component local unit’s current year’s levy.

(2) On or before [month, day, and initial year] and each subsequent year, the county fiscalofficer shall certify to the administering fiscal officer the areawide portion of the levy ofeach component local unit determined pursuant to subparagraph (a) of paragraph (1) above.The administering fiscal officer shall then determine the rate of taxation sufficient to yieldan amount equal to the sum of such levies from the areawide tax base. On or before [monthand day] the administering fiscal officer shall certify said areawide tax rate to each of thecounty [fiscal officers].

(3) If a component local unit is located in 2 or more counties, the computation and certificationsrequired above shall be made by the county fiscal officer who is responsible under otherprovisions of law for allocating between and among the affected counties.

(4) Within each qualifying local unit, the taxation of each parcel of commercial-industrialproperty, [including property located within a tax increment financing district, as defined inSection [14-302], shall be determined as follows: the areawide tax rate shall be applied tothat percentage of the property equal to the commercial-industrial contribution percentage;the tax rate from all jurisdictions exercising taxing authority over the property shall applyto the remainder of the property.

(5) Within each qualifying local unit, the taxation of each parcel of residential property shall bedetermined as follows: the value of the property that is not defined as excess residentialproperty is taxed at the rate applicable by all qualifying local units exercising taxingauthority over the property; the areawide tax rate shall be applied to that percentage of theexcess residential portion of the property equal to the excess residential contributionpercentage; the tax rate from all jurisdictions exercising taxing authority over the propertyshall apply to the remainder of the excess residential portion of the property.

(6) The administering fiscal officer shall determine for each county the difference between thetotal levy on distribution value within the county and the total tax on contribution valuewithin the county. On or before [month, date] of each year, he or she shall certify thedifference so determined to each county fiscal officer. In addition, the administering fiscalofficer shall certify to those county [fiscal officers] for whose county the total tax on

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contribution value exceeds the total levy on distribution value the settlement the county isto make to the other counties of the excess of the total tax on contribution value over the totaltax levy on distribution value in the county. On or before [month, date] and [month, date]of each year, each county [treasurer] in a county having a total tax on contribution value inexcess of the total levy on distribution value shall pay the excess to the other counties inaccordance with the certification of the administering fiscal officer.

14-110 Miscellaneous Adjustments to Local and Areawide Rates and Levies

[Insert adjustments required by virtue of other provisions of law, such as: (a) the prorationof such debt or expenditure limitations as are related to the value or valuation of taxablereal or personal property; (b) adjustments in assessed valuation required by equalizationauthorities; (c) changes in required certification dates for tax rolls and the setting of taxrates; (d) adjustments necessitated by reassessments or by properties erroneously omittedfrom tax rolls; and (e) late or incorrect certifications of levies or tax rates.]

14-111 Changes in Status of Qualifying Local Units

(1) If a qualifying local unit is dissolved, is consolidated with all or part of another local unit,annexes territory, has a portion of its territory detached from it, or is newly incorporated, the[secretary of state] shall immediately certify that fact to the [commissioner of revenue]. The[secretary of state] shall also certify to the [commissioner of revenue] the current populationof the new, enlarged, or successor qualifying local unit, if determined by the [state or localboundary adjustment agency] incident to the consolidation, annexation, or incorporationproceedings. The population so certified shall govern for purposes of this Act until the [stateor regional planning agency] files its first population estimate as of a later date with the[commissioner of revenue]. If an annexation of unincorporated land occurs, the populationof the annexing qualifying local unit as previously determined shall continue to govern forpurposes of this Act until the [state or regional agency] files its first population estimate asof a later date with the [commissioner of revenue].

(2) In determining the own source revenues or equalized assessed value of property attributableto a successor qualifying local unit for a year prior to a change in status, such amount shallbe deemed the sum of the amounts of its predecessor units. If any of the predecessors weredivided incident to the change, then for the purposes of this Act, its own source revenuesshall be apportioned among its successors in proportion to the division of the populationbetween them, and the equalized assessed value of property located therein shall be allocatedto the successor in which the property is located.

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36Mich. Comp. Laws §124.505 (1991); Ohio Rev. Code §§715.69 to 715.71 (1995) (these sections cover “jointeconomic development zones” for municipalities and “joint economic development districts” for municipalities andunincorporated townships); and Code of Va., Ch. 26.2:1 (1994).


14-112 Tax Collection and Disbursements to Qualifying Local Units

‚ The provisions dealing with collection and disbursement may be addressed elsewhere in theproperty tax code. The following language is presented if it is desired to modify thoseprovisions.

[(1) Tax bills rendered to owners of commercial-industrial property shall, among other items,include: (a) the total assessed value of the property; (b) the value of the areawide portion, theareawide tax rate, and the amount due on the areawide portion; and (c) the value of the localportion, the local tax rate, and the amount due on the local portion. Remittances shall bemade to the county [collector(s) of revenue] of the area county or counties in which theproperty is located.

(2) Tax bills rendered to owners of residential property shall, among other items, include: (a) thetotal assessed value of the property; (b) the value of the areawide portion, the areawide taxrate, and the amount due on the areawide portion; and (c) the value of the local portion, thelocal tax rate, and the amount due on the local portion. Remittances shall be made to thecounty [collector(s) of revenue] of the area’s county or counties in which the property islocated.

(3) The county fiscal officer of each county shall transfer to the component taxing jurisdictionswithin the county, the amounts attributable to respective local rates and to the qualifyinglocal units their respective distributive shares of the areawide tax, as calculated pursuant toSection [14-107] of this Act.]

14-113 Separability [Insert separability clause.]

14-114 Effective Date [Insert effective date.]

INTERGOVERNMENTAL AGREEMENTS

Commentary: Intergovernmental Agreement for a Joint Economic Development Zone

The following model provides for a voluntary intergovernmental agreement among two or moreunits of local government to establish a joint economic development zone. The statute is based onlegislation from Michigan, Ohio, and Virginia.36 Under this model, the zone may be located withinthe boundaries of one or more local government units. The local governments negotiate what public

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services and facilities are to be provided to the area included in the zone, and which tax and otherrevenues that result from commercial, industrial, and other development will be shared, and in whatamounts or proportions. Local governments may also address joint planning and jointadministration of development regulations in the agreement. In addition, as a quid pro quo, amunicipality may agree not to annex land in an unincorporated area in exchange for sharing ofrevenue. Or a municipality may annex land from the unincorporated area and share the resultingrevenues with the county or township.

The model statute lists the typical taxes – real property, sales, and income – that states generallyauthorize as potential sources of revenue for voluntary sharing. Some states may also permit locallodging, restaurant, or specialized sales taxes. Because each state has its own suite of taxes andother revenue sources that may be levied by local governments, this model must be adapted toaddress those sources.

It should be noted, however, that the model statute does not contemplate extraterritorial taxation.For example, if the state permits municipalities to levy local income taxes, and the joint economicdevelopment zone is located in an unincorporated area, then the municipality could not impose itslocal income tax on residents and business in that area. But, if the economic development zone werelocated in the municipality, then the municipality could collect its income tax and share its benefitswith the county, township, or other unincorporated unit under a distribution formula contained inthe agreement.

14-201 Joint Economic Development Zone

(1) Two or more local governments may enter into a contract whereby they agree to share in thecosts of improvements and/or services and in the revenues from taxes and other revenuesources for an area located in one or more of the contracting local governments that theydesignate as a joint economic development zone for the purposes of facilitating new orexpanded growth for commercial and/or industrial development in the state, ensuring theequitable sharing of resources and liabilities among the contracting local governments, andproviding an alternative to annexation. The zone created shall be located within the territoryof one or more of the contracting local governments and shall consist of all or a portion ofsuch territory.

(2) The contract shall set forth:

(a) the names of the contracting local governments;

(b) a legal description of the area to be designated as the joint economic developmentzone, including a map in sufficient detail to denote the specific boundaries of thearea or areas;

(c) the amount or nature of the contribution of each contracting local government to thedevelopment and operation of the zone. The contributions may be in any form to

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which the contracting governments agree and may include, but shall not be limitedto, the provision of services, money, real or personal property, facilities, orequipment. The contract shall provide a schedule for the provision of any new,expanded, or additional services and facilities;

(d) any other terms and conditions identified pursuant to paragraphs (3) (4), (5), and (9)of this Section; and

(e) terms setting forth the duration of the contract.

(3) The contract shall set forth the formula or formulas for allocating any tax and other revenuesto be shared from the joint economic development zone and a schedule and method ofdistribution of the shared revenues, as may be agreed upon by the contracting localgovernments. Taxes and other revenues to be shared may include:

[(a) any [municipal or local] income tax revenues derived from the income earned bypersons employed by businesses that located within the economic development zoneafter it is designated as such by the contracting local governments and from the netprofits of such businesses;]

[(b) any local real property tax revenues derived from commercial and industrial realproperty located in the economic development zone after it is designated as such bythe contracting local governments;]

[(c) any local revenues resulting from fees, charges, and fines derived from commercialand industrial real property located in the economic development zone after it isdesignated as such by the contracting local governments;]

[(d) any local sales tax revenues derived from sales from businesses located in theeconomic development zone after it is designated as such by the contracting localgovernments] and;

[(e) [add other taxes that could be shared].]

(4) The contract may provide for the joint comprehensive planning of the economicdevelopment zone and the administration of zoning, subdivision, and other land-useregulations, building codes, inspection of public improvements, and other regulatory andproprietary matters that are determined, pursuant to the contract, to be for a public purposeand to be desirable with respect to the operation of the economic development zone or tofacilitate new or expanded economic development, provided that no contract shall exemptthe territory within the zone from procedures and processes of land-use regulation applicablepursuant to local regulations or ordinances.

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(5) The contract may provide for a waiver of annexation rights pursuant to [the state annexationstatute] and such other provisions as the contracting local governments may deem in theirbest interests.

(6) Before the legislative authority of any of the contracting local governments enacts anordinance approving a contract to designate a joint economic development zone, thelegislative authority of each of the contracting local governments shall hold a public hearingconcerning the proposed zone and contract. Each such legislative authority shall provide atleast [30] days notice of the public hearing in a newspaper of general circulation in the areaserved by the local governments [and may give notice by publication on a computer-accessible information network or by other appropriate means].

(7) The public notice advertising the hearing shall:

(a) contain a statement of the substance of the hearing and a description, including amap, of the proposed joint economic development zone;

(b) specify the officer(s) or employee(s) of the legislative authority from whomadditional information may be obtained;

(c) contain a statement that a true copy of the contract is available for public inspectionin the office of the [clerk of the legislative authority] of each of the contracting localgovernments; and

(d) specify the date, time, place, and method for presentation of statements by interestedpersons.

(8) After the public hearings required by this Section have been held, the legislative body ofeach contracting local government may enact an ordinance approving the contract todesignate the joint economic development zone. Prior to the enactment of the ordinance, thelegislative bodies of the contracting local governments may modify the contract as aconsequence of statements made at the public hearings or for any other reason withoutholding additional public hearings.

(9) A contract entered into pursuant to this Section may be amended, and may be renewed,canceled, or terminated as provided in or pursuant to the contract. The contract shallcontinue in existence throughout its term and shall be binding on the contracting parties andon any entities succeeding to such parties, whether by annexation, merger, or otherwise.

(10) Upon the enactment of an ordinance approving a contract to designate a joint economicdevelopment zone or any amendments to the contract, the contracting party shall certify acopy of the ordinance and the contract to the director of the [state department ofdevelopment or state planning agency], who shall maintain a list of local governments in thestate that have established joint economic development zones.

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37See generally Donald G. Haman and Julian C. Juergensmeyer, “Urban Renewal and DowntownRevitalization,” in Urban Planning and Land Development Control Law, (2nd Ed.) (St. Paul, Minn.: West, 1986), 526-553; Daniel R. Mandelker, Gary Feder, and Margaret Collins, Reviving Cities with Tax Abatement (New Brunswick,N.J.: Center for Urban Policy Research, 1980) (analysis of impact of Missouri Urban Redevelopment Corporations Law).


REDEVELOPMENT AND TAX RELIEF

Commentary: Redevelopment Areas37

THE BENEFITS AND PROBLEMS OF REDEVELOPMENTRedevelopment, as the name implies, involves the development or improvement of an area that

has at some time (recent or distant) undergone development but has since deteriorated socially orphysically, suffered some calamity, or that development has become obsolete. As this Section usesthe term, redevelopment applies to areas where market forces are not providing sufficient capital andeconomic activity for a recovery; where public investment, capital improvements, or promotion andtechnical assistance are required to “prime the pump.”

The methods for achieving redevelopment are many. The local government may improve thebusiness climate or livability of the area, and demonstrate confidence in its recovery, by makingcapital improvements and improving public services – fixing and upgrading streets and sidewalks,providing better parks and playgrounds, repairing and expanding schools and libraries, hiring streetcleaners. It may improve the image of the area among potential investors, merchants, and residentswith advertising and marketing. Assistance in the form of advice and information may be providedto new and existing businesses in the area. Loans may be made to persons renovating their residenceor business, or the local government may secure such loans made by private lenders. Grants and taxbreaks may be provided for residential or business improvements. Larger businesses may beencouraged with financial and other incentives to locate facilities in the area.

Every state has at least one statutory system for creating, financing, and operating redevelopmentareas. The problem is that most states have several such systems, each with different purposes,adoption procedures, financing, and methods of redevelopment. Many of these separate lawsoverlap; several different statutory schemes potentially apply to the same area in need ofredevelopment. These separate statutes were often created to receive or transmit funding or otherassistance from particular Federal or state programs.

Since one of the functions of redevelopment is to make investment in the redevelopment areamore straightforward and certain, there is a need to replace this confusing multiplicity of enablinglegislation with a single, flexible redevelopment statute. While there are as many differentredevelopment programs as there are reasons or causes for redevelopment, there are many commonelements in redevelopment that can be addressed by a statute that is sufficiently specific to provideguidance to local governments while being general enough that redevelopment programs are tailoredto the particular redevelopment area.

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3842 U.S.C. §§1441 et seq. (1999).

39Federal Housing and Community Development Act, 42 U.S.C. §§5301 et seq..

4042 U.S.C. §§4601 et seq..

41Cal. Health & Safety Code §§33000 et seq..

42Cal. Health & Safety Code §§33301, 33302.



FEDERAL STATUTES ON REDEVELOPMENTThere have been several Federal programs for providing financial assistance to local

redevelopment activities, going back to the Federal Housing Act of 1949,38 if not further to NewDeal programs. The earlier programs took the form of “urban renewal” or “slum clearance”: in areascharacterized by large numbers of inadequate or dangerous buildings, the local government, withFederal financial assistance, would condemn property containing such buildings, raze thesubstandard structures, build new buildings, and sell or lease the new property to private owners.These projects were often large, involving the consolidation of dozens of separate lots or parcelsunder local government ownership and their subsequent redivision after the new buildings andstructures were completed.

However, in some instances, entire blocks or neighborhoods of viable buildings were razed dueto age and perceived obsolescence, residents and businesses were displaced for months ofreconstruction, and the replacement buildings were sometimes priced beyond the means of theprevious residential and commercial tenants. In response to some of these excesses, Congressreplaced the earlier statutes that authorized major, sweeping, projects with more modest programsthat focus on renovating existing buildings where possible, such as the Community DevelopmentBlock Grant program.39

Another response to urban renewal “horror stories” was a statute40 that sets uniform policies forreal property acquisition and relocation assistance on Federal projects and federally funded localprojects. Negotiated purchase of property is preferred over the employment of eminent domain, andpersons and businesses displaced by the renovation or demolition of buildings are to receivecompensation for certain expenses incurred as a result of the displacement.

EXISTING STATE REDEVELOPMENT STATUTESCalifornia has a comprehensive Community Redevelopment Law.41 Before any local

government may engage in redevelopment, it must have a planning agency and have adopted acomprehensive plan.42 The local government must adopt a redevelopment area plan after due noticeand a public hearing, and similar public participation is required for the amendment of aredevelopment area plan.43 The required and authorized content of redevelopment area plans isspelled out in detail, as is an express requirement that the redevelopment area plan be consistent with

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49Cal. Health & Safety Code §33607.5.



52Cal. Gov’t Code §§53311 et seq..



55Fla. Stat. §§163.330 et seq..


the comprehensive plan.44 Redevelopment areas must be found to be predominantly blighted.45 Inorder to avoid some of the excesses of urban renewal in the past, and to avoid appearances ofcorruption and favoritism, there are detailed provisions governing the purchase and condemnationof real property,46 the management of property owned for redevelopment,47 and requirementsregarding relocation assistance to residents displaced by redevelopment activities.48 Also, where aredevelopment area receives tax increment financing, 25 percent of that revenue must be set asidefor low and moderate income housing, though not necessarily located within the redevelopmentarea.49 Redevelopment may be financed by tax increment financing, by the issuance of bonds ornotes, or by appropriations by the local government from any tax it is authorized to impose.50 Withinredevelopment areas, the power to approve development may be designated by the plan to theredevelopment agency or the local planning agency.51

Industrial development in economically depressed areas is encouraged by authorizing localgovernments to create industrial development authorities, financed by the issuance of industrialrevenue bonds. Community facilities districts52 and community rehabilitation districts53 may becreated by local governments to construct or rehabilitate, respectively, public capital improvementsin underdeveloped areas, financed by the issuance of bonds and/or the imposition of special taxlevies. Infrastructure finance districts,54 governed by an infrastructure financing plan and fundedthrough tax increment financing, are also authorized.

Florida’s Community Redevelopment Act55authorizes counties and municipalities to adoptcommunity redevelopment plans for areas where the legislative body has “determined such area to

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56Fla. Stat. §163.360.

57Fla. Stat. §163.360.

58Fla. Stat. §163.346.

59Fla. Stat. §163.360.

60Fla. Stat. §163.345.

61Fla. Stat. §163.370.

62Fla. Stat. §163.375.

63Fla. Stat. §163.385.

64Fla. Stat. §163.387.

65Fla. Stat. §163.445.

66Fla. Stat. §163.458.

67Fla. Stat. §163.461.


be a slum area, a blighted area, or an area in which there is a shortage of housing affordable toresidents of low or moderate income, including the elderly, or a combination thereof, and designatedsuch area as appropriate for community redevelopment.”56 The community redevelopment planmust be preceded by a notice and public hearing, and is required to be consistent with the countyor municipal comprehensive plan.57 Before a community redevelopment plan or redevelopmentordinances may be adopted, written notice must be given to all taxing bodies in the redevelopmentarea.58 Open land may not be acquired by the county or municipality for redevelopment unless theplan includes a series of specific findings provided in the Act.59 Counties and municipalitiesengaging in redevelopment are required to “afford maximum opportunity, consistent with the soundneeds of the county or municipality as a whole, to the rehabilitation or redevelopment of thecommunity redevelopment area by private enterprise.”60

In order to implement the community redevelopment plan, counties and municipalities areauthorized to enter into contracts, acquire and sell land and structures, demolish, renovate, andconstruct buildings, mortgage real property, acquire and develop air rights over highways andrailways, borrow money and receive loans and grants, engage in community policing, and employseveral other enumerated powers.61 They may utilize eminent domain,62 issue bonds secured byredevelopment revenue,63 and employ tax increment financing.64 Technical assistance65 and stategrants66 are available for community redevelopment. For the state grant program, there are detailedreporting and evaluation requirements that measure redevelopment progress – and how efficientlystate funds are being used – with several concrete numerical measures.67

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68Fla. Stat. §§190.001 et seq..

69Fla. Stat. §190.004.

70Fla. Stat. §§190.011, 190.021.

71Fla. Stat. §190.006.

72Fla. Stat. §190.012.

73Fla. Stat. §190.008.

74Fla. Stat. §190.013.

7565 Il. Comp. Stat. §§5/11-74-1 et seq..

7665 Il. Comp. Stat. §§5/11-74.2-1 et seq..


7865 Il. Comp. Stat. §§5/11-74.4-1 et seq., discussed in more detail in the Commentary to Section 14-302, TaxIncrement Financing.

79Pursuant to the Blighted Areas Redevelopment Act, 315 Il. Comp. Stat. §§5/1 et seq., Illinois’ “traditional”urban renewal statute.


Florida also has a Uniform Community Development District Act, adopted in 1990.68 It replacesformer laws on community development districts, although pre-existing community developmentdistricts were allowed to continue under their old enabling act.69 Districts are granted the usualpowers of a body politic and corporate (buy, own, and sell land, form contracts, borrow money, sueand be sued, employ workers as state employees, enact rules, etc.) and are granted the authority tolevy fees and taxes as well.70 They are governed by a board of supervisors, elected for four-yearterms by the landowners of the district, who are allotted one vote per acre owned.71 Districts mayconstruct and operate public improvements such as water, sewer, highway, transit, and park systemsand conservation works.72 Though an annual budget is required,73 as is a water management planwhen the district provides water service,74 there is no requirement of a plan governing thedevelopment of the district.

Illinois is the classic case of a state with a plethora of similar redevelopment statutes for variouspurposes. The Industrial Project Revenue Bond Act,75 commercial renewal and redevelopment areasstatute,76 business district development and redevelopment statute,77 and the Tax IncrementAllocation Redevelopment Act78 all authorize local governments to address different aspects ofredevelopment, as the names imply. To administer redevelopment, land clearance commissions,79

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80315 Il. Comp. Stat. §§20/1 et seq..

81315 Il. Comp. Stat. §§15/1 et seq..

82Or. Rev. Stat. §§457.010 et seq..



85Or. Rev. Stat. §§285B.230 et seq..

86Or. Rev. Stat. §§285B.050 et seq..


neighborhood redevelopment corporations,80 or community development finance corporations81 maybe created.

Despite their varied titles and purposes, there are some similarities between these statutes. Mostestablish specific criteria for an area to qualify for assistance and specify a relatively narrow set ofpurposes and forms of assistance. Most require the adoption of a plan governing the redevelopmentof the area. The purchase and improvement of real property is expressly authorized in most of thestatutes. And they tend to focus intensively on the details on the issuance, redemption, etc. of bondsand other obligations.

Oregon empowers local governments to create urban renewal agencies for the redevelopmentof blighted areas pursuant to an urban renewal area plan.82 Tax increment financing to pay off urbanrenewal bonds and notes is expressly authorized.83 Local governments may offer property taxexemptions (with certain conditions ensuring affordability) for new single-family residentialconstruction in distressed areas, to encourage the revitalization of the area and the provision ofaffordable housing.84

The unification of economic development activities at the regional level is encouraged.85

Contiguous counties may prepare, with notice and a public hearing, a regional investment plan togovern economic development in the region; the statute specifies the contents of such a plan, andthe plan taxes effect upon adoption by the governor. The counties may then create a boardrepresenting the participating counties to implement it.

Oregon authorizes local governments to engage in business development projects.86 The projectmust be both feasible (development will likely occur) and necessary (development would not occurwithout the project, and there must be private business participation before the state will grant orlend any money for the project.

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87An interesting and useful book on brownfields is Todd S. Davis and Kevin D. Margolis, eds., Brownfields:A Comprehensive Guide to Redeveloping Contaminated Property, (Chicago: Amer. Bar Ass’n, 1997). See also MichaelB. Gerrard, Brownfields Law and Practice, 2 vol. (New York: Matthew Bender, 1999); Peter B. Meyer and Thomas S.Lyons, “Lessons from Private Sector Brownfields Redevelopers: Planning Public Support for Urban Regeneration,”Journal of the American Planning Association, 66, No. 1 (Winter 2000):46-57.

88U.S. Environmental Protection Agency, Region 5 Office of Public Affairs, Basic Brownfields Fact Sheet,(Chicago, 1996).

8942 U.S.C. §§9601 et seq. (1999).

9042 U.S.C. § 9607(a)(1).

9142 U.S.C. §9601(20)(A). Conversely, the courts have found lenders with a role in the management of thepremises to be liable for cleanup costs. U.S. v. Fleet Factors Corp., 901 F.2d 1550 (11th Cir. 1990).

9242 U.S.C. §§9601(35)(A), 9607(b)(3).


BROWNFIELDS87

A “brownfield” has been defined as “abandoned, idled, or underused industrial and commercialfacilities where expansion or redevelopment is complicated by a real or perceived environmentalcontamination.”88 Since one cannot be aware with certainty of all the chemicals and materials everused on industrial or commercial premises, or of the level of care with which they were stored, used,and disposed of, the class of land with “perceived environmental contamination” can potentiallyencompass any lot or parcel ever used for industrial purposes and even for certain commercialpurposes (auto repair shops, for instance).

The brownfield problem – a reluctance to purchase and develop already-developed sites due toa perception that they may be polluted – exists to the degree that it does because of the nature ofliability under Federal and state laws regarding the cleanup of contaminants and the assessment ofthe costs of that cleanup. The Comprehensive Environmental Response, Compensation, and LiabilityAct,89 commonly called CERCLA, was adopted with the purpose of holding parties responsible forthe pollution of land liable for the costs of removing the pollution and restoring the land to its naturalstate. However, the language of the statute is somewhat broader: the past and current owners andoperators of premises where hazardous substances have been released are financially responsiblefor the cleanup of the contamination.90 There is an exception for parties whose ownership interestexists solely to secure a loan or obligation and entails no control of the premises.91 There is also an“innocent owner” exception, but it applies only to parties who “unknowingly acquired contaminatedproperty ... and who undertook all appropriate inquiry at the time of acquisition.”92 Therefore,CERCLA essentially imposes liability for contamination of land upon the past and present ownersand users of the land regardless of their lack of culpability in actually polluting it. Several states

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93Davis, 17.

94See, e.g., N.J. Stat. Ann. §58:10-23.11b.

95Del. Code Ann. tit. 7, § 9105; 415 Il. Comp. Stat. §5/58.9 (liability for costs for voluntary cleanup assignedon a fault basis, damages proportional to polluter’s portion of fault); Ohio Rev. Code §3746.26(A)(1)(b) (lenders notliable so long as they do not actually manage or operate any hazardous waste activities on the premises, even if they havethe power to manage the premises); 35 Pa. Cons. Stat. Ann. §§6027.1 et seq. (lenders liable for contamination only ifthey caused or exacerbated contamination, or compelled their borrower to do so).

96This is the most common approach, adopted by at least 25 states. See e.g., Cal. Health & Safety Code§§25300 et seq.; Mich. Comp. Laws §§20101 et seq.; Me. Rev. Stat. tit. 38, §343-E; Minn. Stat. §115B.175; Neb. Rev.Stat. §§81-15,181 et seq.; Ohio Rev. Code §3746.01 et seq.; Pa. Stat. tit. 35, §§6026.101 et seq.; Wisc. Stat. §§292.11et seq..

97Colo. Rev. Stat. §25-16-305(1); N.J. Stat. Ann. §58:10B-12; Pa. Cons. Stat. Ann. §§6026.301 et seq..

98U.S. EPA, “Land Use in the CERCLA Remedy Selection Process,” OSWER Directive No. 9375.6-11 (May3, 1995).


have adopted statutes modeled on CERCLA,93 and indeed some states94 have imposed legalframeworks stricter than CERCLA.

While CERCLA and its state counterparts were adopted for the useful and indeed necessarypurposes of ensuring a cleaner environment and reducing the exposure of the public to toxicchemicals, there is a negative side effect to the strict liability rule. Potential purchasers anddevelopers of parcels that were once used for industrial purposes become wary of buying anddeveloping such a parcel for fear that they will become responsible for the high cost of cleaning upany contamination caused by previous users. As the potential liability for cleanup of badlycontaminated land can total in the millions of dollars, some developers will not even considerparcels that were used for potentially contaminating industrial or commercial purposes. Instead, theywill construct their developments on previously undeveloped – and therefore presumably pristine– land. Since “brownfields” are usually located in the 19th and early 20th Century industrial districtsof cities and their close-in suburbs, while the most certain place to find untouched “greenfields” nearurban labor and markets is just beyond the (present) extent of urban development, sprawl isencouraged. Thus the negative effect on the development of old industrial sites links the“brownfields” problem to redevelopment.

Recognizing the “brownfields” problem, many states have adopted amendments to theirenvironmental protection statutes. These new rules often create exceptions to strict liability,95 createvoluntary cleanup programs that provide protection from suit for owners who remediate thecontamination of their property according to a state-approved plan,96 authorize remediation measuresthat are appropriate to the intended use of the property,97 or some combination of these. The U.S.Environmental Protection Agency has assisted in this effort by recognizing the intended land useof contaminated premises as a consideration in the degree or level of cleanup,98 and by entering into

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99Davis, 25-26.

100Davis, 26, 48-49.

10142 U.S.C. §9622(g)(1).


agreements not to sue with the buyers of premises that the EPA regulates.99 It has also entered intomemoranda of understanding with some state environmental protection agencies, agreeing to refrainfrom enforcement against premises that the state agency is regulating when that agency finds thatno further remediation of pollutants is required.100 Also, the EPA is permitted, indeed required, byCERCLA to reach a settlement with land owners who (basically) did not store, process, or disposeof hazardous materials on the premises and who had no actual or constructive knowledge that theland had been previously used for the storage, processing, or disposal of hazardous substances, whenthe settlement involves only a minor portion of the cleanup costs.101 However, the condition thatsettlement concern only a minor portion of the costs means that this provision, by itself, assists thenon-polluting owner only when the actual polluting party or parties can be discovered and made topay under CERCLA.

CONTENTS OF THE MODEL STATUTESection 14-301 below provides a uniform but flexible framework for the redevelopment of areas

that require development assistance. There are several authorized grounds for the creation of aredevelopment area; the existence of any two is sufficient authorization to engage in redevelopment.Similarly, a broad range of redevelopment tools is authorized; the local government is empoweredto select the tool or tools most appropriate to the particular redevelopment area.

The key to the proper selection of redevelopment tools is the redevelopment area plan, adoptedpursuant to Section 7-303. It provides the considered guidance that is crucial to the success ofredevelopment. Indeed, it is so essential to redevelopment that without it, the local government isnot authorized to create a redevelopment area.

In order to provide the necessary money for redevelopment, the Section authorizes the localgovernment to borrow money and issue bonds secured by the redevelopment property and revenueor by the general revenues of the local government. The local government is also directed to seekout assistance under all applicable state and Federal programs. If the local government decides thatthe nature or scope of the redevelopment requires a separate entity to conduct redevelopmentactivities, it may create a redevelopment authority with the powers of a non-profit corporation.

The Section also authorizes the creation of business improvement programs. Essentially theequivalent of business improvement districts (BIDs), these are ongoing programs wherebymarketing, capital improvements, and increased services in a business district are financed by aspecial assessment on the businesses and owners of the district or by tax-increment financing. Theirongoing nature is tempered by the fact that they are subject to periodic review.

All new or renovated housing in a redevelopment area must include affordable housing units, atleast 15 percent but no more than 50 percent. Not only does this promote affordable housing as a

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102See Diane R. Suchman, “Mixed-Income Housing” in Developing Infill Housing in Inner-City Neighborhoods(Washington, D.C.: Urban Land Institute, 1997), 59-81; Jon C. Teaford, The Rough Road to Renaissance (Baltimore,Md.: Johns Hopkins University Press, 1990), 249-250, 305.


general policy, it ensures the success of the redevelopment area. It is clearly wrong to concentrateall lower-income residences in a particular area, so that lower-income households are the sole orpredominant residents of the area. A neighborhood needs a significant proportion of middle-classresidents to be economically viable. However, gentrification – the complete or near-completereplacement of affordable housing with relatively expensive market-rate housing – is alsoundesirable.102 A balance of affordable housing and market-rate residential units is therefore oneof the goals of this Section.

Two provisions are included to preclude some of the excesses sometimes attributed to urbanrenewal. Purchase of land is favored over the employment of eminent domain except where anagreed purchase would be unfeasible. And structurally sound buildings must be renovated insteadof destroyed unless the redevelopment area plan provides otherwise. Note that these are not outrightprohibitions by any stretch: a local government intent on buying up all the land in a redevelopmentarea at cheap prices, or on removing all existing buildings from a redevelopment area, could do soby drafting the redevelopment area plan accordingly. The purpose of this provision is to compel thelocal government to make potentially destructive decisions openly and after public consideration andto ensure that such decisions are consistent with the policies of the local comprehensive plan.

14-301 Redevelopment Areas

(1) A local government may adopt and amend in the manner for land development regulationspursuant to Section [8-103 or cite to some other provisions, such as a municipal charter orstate statute governing the adoption of ordinance] redevelopment area ordinances pursuantto this Section.

(2) The purposes of a redevelopment area are to encourage reinvestment in and redevelopmentand reuse of areas of the local government that are characterized by two or more of thefollowing conditions or circumstances:

(a) loss of retail, office, and/or industrial activity, use, or employment;

(b) [40] percent or more of households are low-income households;

(c) a predominance of residential or nonresidential structures that are deteriorating ordeteriorated;

(d) abandonment of residential or nonresidential structures;

(e) environmentally contaminated land;

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(f) the existence of unsanitary or unsafe conditions that endanger life, health, andproperty;

(g) deterioration in public improvements such as streets, street lighting, curbs, gutters,sidewalks, related pedestrian amenities, and parks and recreational facilities;

(h) tax or special assessment delinquency exceeding the fair market value of the land;

(i) recent occurrence of a disaster, as declared by the governor or the President of theUnited States; or

(j) any combination of factors that substantially impairs or arrests the sound growth andeconomic development of the local government, impedes the provision of adequatehousing, or adversely affects the public, health, safety, morals, or general welfaredue to the redevelopment area's present condition and use.

(3) As used in this Section, and in any other Section where “redevelopment areas” are referredto:

(a) “Affordable Housing” means housing that has a sales price or rental amount thatis within the means of a household that may occupy moderate- or low-incomehousing. In the case of dwelling units for sale, housing that is affordable meanshousing in which annual housing costs constitute no more than [28] percent of suchgross annual household income for a household of the size which may occupy theunit in question. In the case of dwelling units for rent, housing that is affordablemeans housing for which the affordable rent is no more than [30] percent of suchgross annual household income for a household of the size which may occupy theunit in question.

(b) “Affordable Housing Cost” means the sum of actual or projected monthlypayments for any of the following associated with for-sale affordable housing units:principal and interest on a mortgage loan, including any loan insurance fees;property taxes and assessments; fire and casualty insurance; property maintenanceand repairs; homeowner association fees; and a reasonable allowance for utilities.

(c) “Affordable Rent” means monthly housing expenses, including a reasonableallowance for utilities, for affordable housing units that are for rent to low- ormoderate-income households.

(d) “Affordable Sales Price” means a sales price at which low- or moderate-incomehouseholds can qualify for the purchase of affordable housing, calculated on thebasis of underwriting standards of mortgage financing available for the housingdevelopment.

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(e) “Area-Based Finance Method” means one or both of the following, employedwithin a redevelopment area in order to finance the provision of redevelopmentassistance tools within the redevelopment area:

1. tax increment financing pursuant to Section [14-302]; and

2. special assessments pursuant to [cite to special assessment statute].

(f) “Business Improvement Program” means the employment of one or more of thefollowing in a redevelopment area, financed solely by area-based finance methodsand/or loans, bonds, and notes secured by the revenue from area-based financemethods and/or the revenue generated by employment of the redevelopmentassistance tools:

1. programs to market and promote the redevelopment area and attract newbusinesses or residents thereto;

2. local capital improvements within the redevelopment area, including, butnot limited to, the installation, construction, or reconstruction of streets,lighting, pedestrian amenities, public utilities, parks, playgrounds,recreational facilities, and public buildings and facilities; and

3. improved or increased provision of public services within theredevelopment area, including, but not limited to, police or security patrols,garbage collection, and street cleaning.

(g) “Direct Development” means the acquisition and disposition by the localgovernment or the redevelopment authority of real property in a redevelopment area,and may include one or more of the following:

1. assembly and replatting of lots or parcels;

2. remediation of environmental contamination;

3. rehabilitation of existing structures and improvements;

4. demolition of structures and improvements and construction of newstructures and improvements;

5. programs of temporary or permanent relocation assistance for businessesand residents; and

6. the sale, lease, donation, or other permanent or temporary transfer of realproperty to public agencies, persons, and entities both for-profit and not-for-profit.

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(h) “Greenfields Area” means a contiguous area that has never been developed or thathas been used solely for agricultural or forestry uses;

(i) “Low-Income Household” means a household with a gross household income thatdoes not exceed 50 percent of the median gross household income for householdsof the same size within the housing region in which the housing is located.

(j) “Low-Income Housing” means housing that is affordable, according to the federalDepartment of Housing and Urban Development, for either home ownership orrental, and that is occupied, reserved, or marketed for occupancy by households witha gross household income that does not exceed 50 percent of the median grosshousehold income for households of the same size within the housing region inwhich the housing is located.

(k) “Moderate-Income Housing” means housing that is affordable, according to the

federal Department of Housing and Urban Development, for either home ownershipor rental, and that is occupied, reserved, or marketed for occupancy by householdswith a gross household income that is greater than 50 percent but does not exceed80 percent of the median gross household income for households of the same sizewithin the housing region in which the housing is located.

(l) “Redevelopment Area Plan” means the subplan or subplans of the localcomprehensive plan authorized by Section [7-303];

(m) “Redevelopment Assistance Tool” means one or more of the following:

1. technical assistance programs to provide information and guidance toexisting, new, and potential businesses and residences in the redevelopmentarea;

2. programs to market and promote the redevelopment area and attract newbusinesses and residents thereto;

3. grant and loan programs to encourage the rehabilitation of residential andnon-residential buildings, improve the appearance of building facades andsignage, and stimulate business start-ups and expansions within theredevelopment area;

4. programs to:

a. guarantee or secure; and/or

b. obtain a reduced interest rate, down payment, or other improvedterms for

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loans made by private, for-profit or not-for-profit, lenders to encourage therehabilitation of residential and non-residential buildings, improve theappearance of building facades and signage, and stimulate business start-upsand expansions within the redevelopment area;

5. tax abatement pursuant to Section [14-303];

6. local capital improvements within the redevelopment area, including, butnot limited to, the installation, construction, or reconstruction of streets,lighting, pedestrian amenities, public utilities, public transportationfacilities, parks, playgrounds, recreational facilities, and public buildingsand facilities;

7. improved or increased provision of public services within theredevelopment area, including, but not limited to, police or security patrols,garbage collection, and street cleaning;

8. provision of land-use incentives within the redevelopment area, pursuant toSection [9-501];

9. provision of assistance, technical, financial, or otherwise, with:

a. applications to the [state environmental protection agency]; and/or

b. site remediation to remove environmental contamination

for the redevelopment area or lots or parcels within it, pursuant to [citebrownfields statute and/or regulations];

10. direct development; and

11. implementation agreements entered into pursuant to Section [7-503].

(n) “Redevelopment Authority” means an entity created pursuant to paragraph (6) ofthis Section for the purpose of implementing a redevelopment area ordinance.

(o) “Redevelopment Program” means a program pursuant to Federal or state statutethat provides redevelopment assistance tools or assists local governments in theprovision of redevelopment assistance tools.

(4) A redevelopment area may be established only pursuant to a redevelopment area ordinanceadopted pursuant to this Section.

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(a) A redevelopment area ordinance shall not be adopted unless the local governmenthas first adopted a local comprehensive plan with a redevelopment area planpursuant to Section [7-303].

(b) A redevelopment area shall not consist of, or include, more than [10 or 25] percentgreenfields area, except for redevelopment areas adopted pursuant to paragraph(2)(i) above. Redevelopment within greenfields areas pursuant to paragraph (2)(i)shall not result in greater area, or density or intensity, of development than that inplace before the occurrence of the disaster.

‚ The purpose of this provision is to prevent the use of redevelopment tools for the initialdevelopment of undeveloped territory. However, an absolute limitation would preclude theemployment of redevelopment tools by a rural local government to recover from a disaster, andtherefore an exception for such a circumstance is necessary. This provision is intended to strikea balance, limiting post-disaster redevelopment in greenfields areas to the restoration of the statusquo before the disaster.

(c) The use of redevelopment assistance tools shall not, in any case, result in any netloss of greenfields area, with the exception of de minimis losses.

‚ An example of a de minimis loss of greenfields due to redevelopment activities would be anaddition to a visitor center, or the construction of handicapped-accessible walkways, in a parkor forest.

(5) A redevelopment area ordinance pursuant to this Section shall include the followingminimum provisions:

(a) a citation to enabling authority to adopt and amend the ordinance;

(b) a statement of purpose consistent with the purposes of land development regulationspursuant to Section [8-103] and the purposes of this Section;

(c) a statement of consistency with the local comprehensive plan, and with theredevelopment area plan in particular, that is based on findings pursuant to Section[8-104];

(d) definitions, as appropriate, for words or terms contained in the ordinance. Wherethis Act defines words or terms, the ordinance shall incorporate those definitions,either directly or by reference;

(e) specific findings, pursuant to the redevelopment area plan and consistent with thepurposes of this Section pursuant to paragraph (2) above, supporting the need toemploy redevelopment assistance tools in the redevelopment area;

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(f) a description, both in words and with maps, of the limits or boundaries of theredevelopment area pursuant to the redevelopment area plan;

(g) a detailed description of the redevelopment assistance tools that will be employedin the redevelopment area and the manner and locations in which they will beemployed. Where direct development is to be employed and 42 U.S.C. §§4601 etseq., as amended, is applicable, the local government shall adhere to the uniformrelocation assistance and real property acquisition policies pursuant to that statute;

(h) for any redevelopment area plan that includes or encompasses residential uses, arequirement that any new or renovated housing development that shall receiveassistance through any redevelopment assistance tools shall include affordablehousing units in a proportion determined by the redevelopment area ordinance butin any case not less than [15] percent nor more than [50] percent. The redevelopmentarea ordinance shall also include provisions, pursuant to paragraph (9) below, toensure that affordable housing remains affordable.

(i) an enumeration of all redevelopment programs for which the redevelopment areamay be eligible, and an instruction to the agency or entity designated to oversee andadminister implementation of the ordinance pursuant to subparagraph (k) below toapply for and seek inclusion in such redevelopment programs;

(j) a detailed financial plan, consistent with the local government’s budget and itscapital improvement program pursuant to Section [7-502], containing reasonableprojections of the:

1. cost of the redevelopment assistance tools to be employed; and

2. sources of funding for such costs, including, but not limited to,redevelopment programs and/or area-based finance methods whereapplicable;

(k) the designation of one or more public agencies or not-for-profit entities to overseeand administer the implementation of the ordinance. If more than one agency orentity is designated, the ordinance shall specify the jurisdiction or responsibility ofeach agency or entity in a manner that the relative powers and duties of each arereasonably clear;

(l) a requirement that any non-governmental entity that receives financial assistance,whether a grant, loan, or loan guarantee, under the redevelopment area ordinanceshall make reasonable periodic accountings to the designated agency or entity; and

(m) either one of the following:

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1. a statement of a specific date after which the redevelopment assistance toolswill not be employed within the redevelopment area; or

2. provision for periodic analysis and review by the [local planning agency]of the development activity in the redevelopment area, in light of thepurposes of this Section pursuant to paragraph (2) above, regarding the needto employ redevelopment assistance tools in the redevelopment area. Suchanalysis shall be in writing and shall be submitted to the local legislativebody.

except that where the redevelopment assistance tools constitute or include a businessimprovement program, subparagraph (5)(m)1 shall not apply.

‚ Business improvement programs are intended to be ongoing, though not automaticallypermanent, and therefore are exempted from the absolute time limit “sunset” requirement but arestill subject to periodic review.

(n) provision for the complete disposition of assets, collection of obligations, andrepayment of debts remaining at the termination of the redevelopment assistancetools pursuant to paragraph (5)(m) above.

(6) Consistent with the detailed financial plan of the redevelopment area ordinance pursuant toparagraph (5)(j) above, a redevelopment area ordinance pursuant to this Section mayauthorize and direct the local government to borrow money through loans, bonds, or notes,which may be unsecured or which may be secured by one or more of the following:

(a) revenues from area-based finance methods and/or revenues generated fromemployment of the redevelopment assistance tools;

(b) real property and other assets held pursuant to the redevelopment area ordinance,including the provision of mortgages, liens, or security interests on the same; and

(c) the general revenues of the local government.

The redevelopment area ordinance may authorize and direct the local government toguarantee and secure loans made by private lenders by the same means.

(7) A redevelopment area ordinance pursuant to this Section may create a redevelopmentauthority and designate it to oversee and implement the redevelopment area ordinance or aportion thereof pursuant to subparagraph (5)(k) above.

(a) The redevelopment authority shall be governed by a board of directors, consistingof an odd number of directors.

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1. The chairperson of the local planning commission, or the director of thelocal planning agency if there is no local planning commission, shall be adirector ex officio. The development area ordinance may specify that otherdirectors shall be local government officials sitting ex officio, but no morethan half of the directors may be directors ex officio.

2. The other directors shall be [bona fide residents of the local government]appointed by the chief executive officer of the local government with theapproval of the local legislative body for a term of [2] years or the durationof the development area pursuant to subparagraph (5)(m) above, whicheveris shorter. The redevelopment area ordinance may provide for thestaggering of terms of these directors, so that, in each year, half of thedirectorships under this paragraph (7)(a)2 are subject to appointment.

‚ The residency requirement is optional because some adopting legislatures may feel strongly thathaving outside expertise on the board is more important than having an all-resident board.

3. Except as provided in subparagraph 4 below, or when the redevelopmentarea has no residents and no business enterprises located in it, at least onedirector, but no more than half of the directors, shall be:

a. a resident of the redevelopment area, if the redevelopment area ispredominantly residential in use;

b. an officer of a business entity operating a business enterprise in theredevelopment area, or an owner of a more than [10] percent in abusiness entity operating a business enterprise in the redevelopmentarea, if the redevelopment area is predominantly commercial orindustrial in use; or

c. one of each of the above two, if the redevelopment area containsareas of both residential and nonresidential uses.

4. Where the redevelopment authority is to implement a business improvementprogram, at least a majority of the directors other than the director ordirectors ex officio shall be officers of business entities operating a businessenterprise in the redevelopment area, owners of a more than [10] percent inbusiness entities operating business enterprises in the redevelopment area,or residents of the development area. No two or more directors shall beofficers of, or owners of a more than [10] percent interest in, the samebusiness entity.

5. For the purposes of this paragraph (7)(a), “redevelopment area” includes allredevelopment areas operated or implemented by the same redevelopmentauthority.

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‚ Therefore, if a single non-profit organization is selected to operate multiple redevelopment areasin a local government, the residency or business location requirements do not prevent this.

6. Directors shall be reimbursed for any reasonable expenses incurred in theperformance of their duties. Directors pursuant to subparagraph (7)(a)3 or7(a)4 above shall receive reasonable compensation, as determined by thelocal legislative body.

(b) Upon the filing of a copy of the redevelopment area ordinance with the [Secretaryof State or other corporate registry], the redevelopment authority shall have thepowers and duties of a not-for-profit corporation pursuant to the [cite not-for-profitcorporation statute], including, but not limited to:

1. purchasing, holding, improving, mortgaging, selling, leasing, and otherwiseconveying property and interests in property;

2. forming, performing, and enforcing contracts, including contracts for theemployment of staff and other employees;

3. lending and borrowing money, including loans, bonds, and notes securedby the revenues or assets of the redevelopment authority. However, no debtor obligation of the redevelopment authority shall be an obligation of thelocal government, or secured by revenues from area-based finance methodsor by the general revenues of the local government, unless it is firstapproved by the local legislative body; and

4. suing and being subject to civil suit.

All amendments to the redevelopment area ordinance shall be filed with the[Secretary of State or other corporate registry] in the same manner as the originalordinance.

‚ The recording of the redevelopment area ordinance, and any amendments thereto, bothemphasizes the corporate nature of the redevelopment authority and makes the powers and dutiesof the authority clearer to the public.

(c) The redevelopment area ordinance may delegate to the redevelopment authority thepower to exercise eminent domain pursuant to [cite eminent domain statute for localgovernments].

(d) The redevelopment area ordinance shall describe the amounts, sources, and natureof the capitalization of the redevelopment authority.

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1. It may provide that revenue from area-based finance methods shall beconveyed to the redevelopment authority to finance its implementation ofthe redevelopment area ordinance.

2. It shall provide for the complete disposition of any assets, profits, and/ordebt of the redevelopment authority remaining at the conclusion of theredevelopment area ordinance pursuant to subparagraph (5)(m) above.Where a redevelopment authority manages or operates more than oneredevelopment area, the ordinance may provide for final disposition whenall redevelopment areas managed or operated by the redevelopmentauthority conclude pursuant to subparagraph (5)(m).

‚ It is therefore up to the local legislative body whether each redevelopment area operated by acommon redevelopment authority is accounted for, and thus liquidated, separately or jointly.

(e) The redevelopment authority shall make, to the local legislative body:

1. annual reports and accountings; and

2. other accountings as required by the local legislative body.

(8) No director, official, or employee of any agency or entity designated to oversee andimplement the redevelopment area ordinance or a portion thereof pursuant to subparagraph(5)(k) above, shall:

(a) have any substantial financial interest in any land or business enterprise located inthe redevelopment area, including such an interest held by a relative by blood,adoption, or marriage or by a business entity in which the official or employee hasmore than a [10] percent interest. The ownership or rental of one’s primaryresidence within the redevelopment area is not by itself a substantial financialinterest for the purposes of this paragraph;

(b) own or control, directly or indirectly, more than a [10] percent interest in a businessentity that has been or will be awarded, or is under consideration for the awardingof, a contract pursuant to the implementation of the redevelopment area ordinance;or

(c) accept or receive, directly or indirectly by rebate, gift, or otherwise, money or anyother thing of value from an individual or business entity to whom a contract maybe awarded pursuant to the implementation of the redevelopment area ordinance.

The provisions of subparagraphs (a) [and (b)] above shall not apply to directors of aredevelopment authority that are appointed pursuant to subparagraphs (7)(a)3 or 7(a)4 above.However, such directors shall recuse themselves from the [consideration and] decision of allmatters that directly affect their property or enterprise in the redevelopment area.

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‚ Without this last provision, directors appointed to represent the residents or businesses of theredevelopment area would inherently run afoul of these conflict-of-interest provisions.

(9) To ensure that residential development subject to a condition pursuant to paragraph (5)(h)above provides affordable housing, a local government shall enter into a developmentagreement, pursuant to Section [8-701], with the owner of real property subject to such acondition before it employs redevelopment assistance tools in relation to those premises.

(a) The development agreement shall provide for a period of availability for affordablehousing as follows:

1. Newly constructed low- and moderate-income sales and rental dwellingunits shall be subject to affordability controls for a period of not less than[15] years, which period may be renewed pursuant to the developmentagreement;

2. Rehabilitated owner-occupied single-family dwelling units that areimproved to code standard shall be subject to affordability controls for atleast [5] years.

3. Rehabilitated renter-occupied dwelling units that are improved to codestandard shall be subject to affordability controls on re-rental for at least[10] years.

4. Any dwelling unit created through the conversion of a nonresidentialstructure shall be considered a new dwelling unit and shall be subject toaffordability controls as delineated in subparagraph (9)(a)1 above.

5. Affordability controls on owner- or renter-occupied accessory apartmentsshall apply for a period of at least [5] years.

6. Alternatives not otherwise described in this subparagraph shall becontrolled in a manner deemed suitable to the local government and shallprovide assurances that such arrangements will house low- and moderate-income households for at least [10] years.

(b) In the case of for-sale housing developments, the development agreement shallinclude the following affordability controls governing the initial sale and use andany resale:

1. All conveyances of newly constructed affordable housing dwelling unitsthat are for sale shall contain a deed restriction and mortgage lien, whichshall be recorded with the county [recorder of deeds or equivalent official].Any restrictions on future resale shall be included in the deed restriction asa condition of approval enforceable through legal and equitable remedies.

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2. Affordable housing units shall, upon initial sale, and resale in the periodcovered by the development agreement, be sold to eligible low- ormoderate-income households at an affordable sales price and affordablehousing cost.

3. Affordable housing units shall be occupied by eligible low- or moderate-income households during the period covered by the developmentagreement.

(c) In the case of rental housing developments, the development agreement shall includethe following affordability controls governing the use of affordable housing unitsduring the use restriction period:

1. rules and procedures for qualifying tenants, establishing affordable rent,filling vacancies, and maintaining affordable housing rental units forqualified tenants;

2. requirements that owners verify tenant incomes and maintain books andrecords to demonstrate compliance with the agreement and with theordinance; and

3. requirements that owners submit an annual report to the local governmentdemonstrating compliance with the agreement and with the ordinance.

(d) The development agreement shall include a schedule that provides for the affordablehousing units to be built or rehabilitated concurrently with the units that are notsubject to affordability controls.

(10) The local government [or the redevelopment authority] shall acquire real property in aredevelopment area by eminent domain only where and to the extent that the redevelopmentarea ordinance, as amended, specifically states, supported by findings therein includingsubstantial and specific financial and appraisal information, that purchase of the real propertywould be unfeasible. Purchase shall be deemed unfeasible where it would increase the costof acquisition beyond the funding available or where it would unreasonably delay theimplementation of the redevelopment area plan.

‚ Therefore, it is not sufficient for the implementing agency or entity to determine that purchasewould be unfeasible. The local legislative body must agree, and there must be data to support thefindings.

(11) (a) Wherever it is not inconsistent with the redevelopment area plan, structurally-soundbuildings and structures that are designated for redevelopment pursuant to theredevelopment area ordinance shall be renovated and not destroyed.

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103A good introduction to tax increment financing is Sam Casella, Tschangho John Kim, Clyde W. Forrest, andKaren A. Przypyszny, Tax Increment Financing Planning Advisory Service Report No. 389 (Chicago: Amer. PlanningAss’n, 1985). See also Donald G. Haman and Julian C. Juergensmeyer, Urban Planning and Land Development ControlLaw, 2nd Ed. (St. Paul, Minn.: West, 1986), 551-553; Jonathan Davidson, “Tax-Related Development Strategies forLocal Government,” in J. Benjamin Gailey, ed., 1985 Zoning and Planning Law Handbook, (New York: Clark BoardmanCo., 1985) 234-241; Christina G. Dudley, “Tax Increment Financing for Redevelopment in Missouri: Beauty and theBeast,” U. Mo. K.C. L. Rev 54. (1985): 77; Jonathan M. Davidson, Tax Increment Financing as a Tool for CommunityDevelopment,” U. Det. J. Urb. L. 56 (1979): 405.


(b) A historic landmark, as defined in Section [9-301], shall not be destroyed ordemolished pursuant to the redevelopment area ordinance unless the redevelopmentarea plan specifically declares, upon reasonable findings, that the landmark buildingor structure is not structurally sound and cannot be rendered structurally sound andhabitable except at a prohibitive cost. Such findings shall specifically include areasonable estimate of the cost of rendering the building or structure sound andhabitable.

Commentary: Tax Increment Financing

BASICS103

Tax increment financing, or “TIF,” is a method of financing redevelopment activities that isdirectly tied to the success of those activities. With some exceptions, an economically depressed areaof a local government brings in much less tax revenue than an economically healthy area ofequivalent size and population. If such an area can be made attractive to developers, and tax-generating private development occurs where it has not in recent years, then the tax revenuecollected from the area should rise. Tax increment financing taps into this increase in tax revenueto finance the improvements and activities that make redevelopment occur.

Essentially, the local government determines the property tax revenue it is collecting in the givenarea before redevelopment occurs. The local government then borrows money, with loans or by thesale of bonds. The borrowed funds are used in various ways to improve the development prospectsof the area: loans to new businesses, capital improvements, new services such as improved streetcleaning and security patrols, advertising and marketing. As development occurs in the area, taxrevenue increases, and the excess above pre-redevelopment property tax revenue in the area is usedto pay off the loans or bonds and to finance further redevelopment activities. That excess is the “taxincrement” in tax increment financing.

TIF ISSUESTax increment financing sounds very attractive – the local government is (theoretically) not

giving up any revenue, as the tax increment would not (again, theoretically) exist were it not for the

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104State ex rel. Schneider v. City of Topeka, 605 P.2d 556 (Kan. 1980); Metropolitan Dev. & Housing Agencyv. Leech, 591 S.W.2d 427 (Tenn. 1979).

105South Bend Pub. Trans. Corp. v. City of South Bend, 428 N.E.2d 217 (Ind. 1981).

106Meierhenry v. City of Huron, 354 N.W.2d 171 (S.D. 1984); Short v. City of Minneapolis, 269 N.W.2d 331(Minn. 1978); Tribe v. Salt Lake City Corp., 540 P.2d 499 (Utah 1975).

107Metropolitan Dev. & Housing Agency v. Leech, 591 S.W.2d 427 (Tenn. 1979); Richards v. City of Muscatine,237 N.W.2d 48 (Iowa 1975).

108In re Minneapolis Community Dev. Agency, 439 N.W.2d 708 (Minn. 1989), cert. den’d 493 U.S. 894 (1989).


redevelopment activities financed by that increment. However, there are potential problems withTIF.

If tax increment financing is imposed where it is not needed to encourage development – wheredevelopment would have occurred in the absence of TIF – then the tax increment does not represent(or only a portion represents) local government revenues that would not have otherwise beencollected. Instead, the tax increment cuts into general revenue that the local government would haveotherwise received.

This is especially problematic when the tax increment consists not only of the “additional”property tax revenue otherwise payable to the local government but of a general cap at pre-TIFlevels on property valuations or tax assessments. If tax increment financing is structured in thismanner, and is imposed when not necessary, the tax increment also deprives other governmentalbodies that receive property tax revenue – school districts, other special districts, the county, andso forth – of the increase they would otherwise have received.

LEGAL CHALLENGES TO TIFStatutes authorizing tax increment finance have been challenged in the courts on a variety of

theories. The most broadly-applicable grounds – basic constitutional arguments of due process andequal protection – have also been the least successful. Since the property tax assessed and collectedfrom the landowner remains the same, property in the TIF district is not being classified separatelyfrom land outside the district for purposes of equal protection and uniform taxation clauses.104

Courts have rejected claims by taxpayers outside a TIF district that the shifting of tax revenues undertax increment financing causes them to bear a burden for which they receive no benefit.105 Theallocation of TIF money to private development has been upheld against legal challenge when theprivate benefits were incidental to the implementation of a redevelopment plan that served a validpublic purpose.106 Allegations that TIF constitutes a taking have also been unsuccessful,107 as haveclaims that the allocation of TIF revenue to a religiously-affiliated entity in the redevelopment areaconstituted a violation of the establishment of religion clause of the First Amendment (and its state-constitution equivalents).108

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109State v. Miami Beach Redev. Agency, 392 So.2d 875 (Fla. 1980); Denver Urban Renewal Auth. v. Byrne, 618P.2d 1374 (Colo. 1980).

110Richards v. City of Muscatine, 237 N.W.2d 48 (Iowa 1975).

111City of Tucson v. Corbin, 623 P.2d 1239 (Ariz. Ct. App. 1980); Miller v. Covington Dev. Auth., 539 S.W.2d1 (Ky. 1975). But see Metropolitan Dev. & Housing Agency v. Leech, 591 S.W.2d 427 (Tenn. 1979).

112Tax Increment Fin. Comm’n of Kansas City v. J.E. Dunn Constr. Co., 781 S.W.2d 70 (Mo. 1989).

113Miller v. Covington Dev. Auth., 539 S.W.2d 1 (Ky. 1976).

114Alan C. Weinstein & Maxine Goodman Levin, “Tax Increment Financing,” Chapter 33B in Patrick J. Rohan& Eric D. Kelly, eds., Zoning and Land Use Control, Vol. 6 (New York: Matthew Bender & Co. 1998).



On the other hand, specific provisions in state constitutions have been the basis for successfulchallenges to TIF statutes and ordinances on some occasions. Several states impose debt limits onlocal governments, and while some courts have found that bonds financed with tax increments donot apply to the debt limit, on the grounds that the increment would not exist in the absence ofTIF,109 other courts have found that a local government exceeded its limits by issuing TIF-securedbonds.110 Similarly, some courts have struck down TIF ordinances that included a bond issue on thebasis that the issuance of any local government bonds secured by ad valorem taxes must beapproved by referendum.111 Other states, where only measures that would increase taxes or the taxobligation require approval by the voters, rejected this argument.112 Another effective basis for legalattacks on TIF has been specific constitutional provisions that school taxes could be spent only forthe support of public schools; a tax increment on the portion of property taxes intended to fundpublic schools was deemed an improper diversion of educational funding to non-educationalpurposes.113

STATE TIF STATUTESNearly every state has adopted statutes authorizing tax increment financing programs to raise

funds for redevelopment.114

California pioneered tax increment financing and is one of the leading users of TIF. Under itsstatute,115 TIF may be imposed only where it “shall be necessary for effective redevelopment.” TIF-eligible redevelopment areas must be blighted, though it is expressly provided that not all propertyor buildings in the area need be in a blighted condition so long as “such conditions predominate.”Redevelopment areas need not be contiguous. TIF may be applied specifically to promote affordable

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117Mo. Rev. Stat. §§99-800 et seq..

118S.C. Code §§31-6-10 et seq..

119Minn. Stat. §§469.174 et seq..


housing in non-blighted areas by financing a Low- and Moderate-Income Housing Fund. Aredevelopment plan for the TIF area must be adopted, and it must contain a time limit, which for theexercise of eminent domain can be no more than 12 years from the plan’s adoption.

The local government may issue bonds or obligations secured by revenue from the TIF, from theaffected or other redevelopment projects, from general local government taxes, or from state andfederal assistance funds. The TIF revenue must be deposited into a separate account for theredevelopment area. At least 20 percent of the increment revenue must be spent on low- andmoderate-income housing for displaced residents unless housing needs in the local government arealready met.

Illinois’ Tax Increment Allocation Redevelopment Act116 was the model for the TIF statutes inMissouri117 and South Carolina.118 The area must be found to be “blighted” (several factorsconstituting blight are defined) or to constitute a “conservation area” (areas with at least half thehousing over 35 years old that are not blighted but may become blighted due to certain enumeratedfactors) to qualify for tax increment financing. Redevelopment areas must consist of contiguousproperties. A redevelopment plan must be adopted for the area before it is created, and the plan mustbe consistent with the comprehensive plan and found to be necessary to the development of the area.There must be notice – to the public, property owners and residents of the area, and affected taxingunits – and a hearing before the redevelopment area can be declared and tax increment financingimposed. The redevelopment area cannot be in effect more than 23 years, and no bond or obligationto finance redevelopment can last longer than the redevelopment area.

The property tax increment itself is derived as follows: The property tax assessments of all theland in the redevelopment area at the time of the adoption of the TIF ordinance are added together.The property tax rates of the various taxing units are then applied to that figure rather than to thepresent assessed value of the properties, and the sums derived are paid to the taxing units as in theabsence of TIF. What is left over from the application of the tax rates to the present assessed valuesonce that sum is paid goes into a special account to cover redevelopment costs and/or debt serviceon bonds issued to pay redevelopment costs. Under the Illinois statute, local sales taxes may alsobe subjects of tax increment financing.

To finance redevelopment, the local government may issue bonds and other obligations, securednot only by TIF revenue, but also by general tax revenue, revenues from redevelopment activities,mortgages on redevelopment property, or even the full faith and credit of the local government.

Minnesota, along with California as mentioned above, is one of the leading states in employingtax increment financing. Its statute119 provides that TIF may be applied in certain “redevelopment

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120Ohio Rev. Code §§5709.40 et seq. (municipalities), §§5709.73 et seq. (townships), and §§5709.77 et seq.(counties).

121N.Y. Gen. Mun. Law §970-n.

122Fla. Stat. §163.340(2).

123Ky. Rev. Stat. §§99.751(8), 99.761.


districts” and “housing districts” as defined by certain criteria, and in catch-all, less-stringent“economic development districts.” To exclude farmland and undeveloped land from TIF districts,TIF areas cannot include vacant land unless that land meets very specific and narrow criteria.Redevelopment and housing districts may have a duration of 25 years, while economic developmentdistricts can last no more than the shorter of 10 years from the adoption of the tax incrementfinancing plan or 8 years from the receipt of the first tax increment. A tax increment financing planmust be adopted for the TIF district after notice and a hearing, and it must specify the redevelopmenttools and activities it will be financing. The entire tax increment may be applied to redevelopmentcosts and debt service pursuant to the TIF plan.

Ohio’s statute120 addresses the issue of property taxes assessed on behalf of other governmentalunits. School districts that are affected by a TIF district must be notified of its creation. The schoolboard must approve the TIF, or a payment in lieu of taxes must be made to the school district, if itwill exist more than ten years or affect more than a certain percentage of the assessed valuation.Agreements exempting a portion of the tax increment (that is, paying part of the tax increase to theschool district) may also be entered into by the local government and the school district. [Otherstates have also addressed this issue. New York121 and Florida122 exempt school districts from theapplication of tax increment financing. Kentucky123 allows taxing units to exempt themselves – ataxing unit must agree with the local government for its tax revenue to be subject to the taxincrement.]

More generally, the Ohio TIF statutes provide that a tax increment financing district must becreated by ordinance. The ordinance must include a fixed term for the district, not to exceed thirtyyears, and must be filed with the state Department of Development. The local government must alsofile annual status reports with the Department for the duration of the TIF district.

CONTENTS OF THE MODEL STATUTEOne of the central features of Section 14-302 below is that tax increment financing is intrinsically

linked to the broader redevelopment program it is intended to finance. A TIF ordinance cannot beadopted unless there is a redevelopment area plan in place and an ordinance to implement that planhas been adopted. As with all other land development regulations, a TIF ordinance must beconsistent with the development area plan. In this manner, TIF is coordinated with the broaderefforts to redevelop a “depressed” or underdeveloped area. Unlike the TIF statutes of some states,this model does not describe how TIF money is to be spent; this is determined by the redevelopmentarea plan and the redevelopment area ordinance implementing it.

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Another important element of the Section, derived from several of the existing state statutes, isthat tax increment financing must be found to be essential; that is, without TIF, the redevelopmentarea plan could not be implemented. As discussed above, tax increment financing is a special toolto be used only where necessary. On the other hand, redevelopment activity is generally desirableand encouraged, and the Guidebook generally does not apply a necessity test to the adoption of aredevelopment area plan or ordinance. Therefore, the necessity requirement has been placed inbrackets so that it is optional: each adopting legislature may include or remove it.

There are several places in the text where “on behalf of the local government” is in brackets. Thisis alternative language, creating two different approaches to property tax increments. With thebracketed phrase omitted, the tax increment represents all new or additional property tax revenuein the redevelopment area, whether collected on behalf of the local government or some other taxingentity (school districts, for instance). When the bracketed language is included, only the additionalproperty tax revenue collected for the local government is included in the tax increment, eliminatingclaims that TIF is cutting into the tax revenues of other government bodies.

The Section authorizes local governments, at their option, to impose tax increment financing onlocal sales taxes. Unlike real property taxes, it is typical for local governments to collect their ownsales taxes. Therefore, TIF applies under the Section only to the local government’s own sales taxes;there is no alternative language as with the real property tax increment.

The model statute provides for the deposit of the tax increment revenue in a special account andfor the distribution of any funds remaining in that account when redevelopment activities terminate.Since the total tax increment represents revenue that was collected pursuant to the regular realproperty and/or sales taxes but was set aside for a special purpose – redevelopment – when thatspecial purpose terminates, those funds should go where tax revenue normally goes. If the taxincrement applies only to the property and sales tax assessed on behalf of the local government, theleftover money goes into the local government’s general fund. If the tax increment represents theadditional property and sales taxes that would have gone to all taxing units, the funds are distributedto the taxing units pro rata. Unused sales tax increment go back to the local government, since theincrement is upon only the local government’s sales tax.

14-302 Tax Increment Financing

(1) A local government may adopt and amend in the manner for land development regulationspursuant to Section [8-103 or cite to some other provisions, such as a municipal charter orstate statute governing the adoption of ordinance] a tax increment finance ordinancepursuant to this Section.

(2) The purposes of tax increment financing are to:

(a) finance the redevelopment of duly-established redevelopment areas;

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(b) raise funds for such redevelopment without unduly burdening the public at large;and

(c) account for the costs and benefits of such funding in a manner transparent to thepublic.

(3) As used in this Section, and in any other Section where “tax increment financing” is referredto:

(a) “Base Individual Property Tax” means the real property tax assessed [on behalfof the local government] on an individual lot or parcel in the redevelopment area atthe last assessment of real property taxes before the adoption of the tax incrementfinance ordinance;

(b) “Base Sales Tax” means the taxes levied by, and collected by or on behalf of, thelocal government pursuant to [cite sales tax statutes] on transactions at places ofbusiness located within the redevelopment area for the [6] months preceding thecalendar month in which the tax increment finance ordinance becomes effective;

(c) “Individual Property Tax Increment” means the difference between the baseindividual property tax and the present individual property tax;

(d) “Present Individual Property Tax” means the real property tax assessed [onbehalf of the local government] on an individual lot or parcel in the redevelopmentarea at the most recent assessment of real property taxes;

(e) “Present Sales Tax” means the taxes levied by, and collected by or on behalf of,the local government pursuant to [cite sales tax statutes] on transactions at placesof business located within the redevelopment area for every [6] month period,commencing with the calendar month directly following the month in which the taxincrement finance ordinance becomes effective;

(f) “Sales Tax Increment” means the difference between the base sales tax and thepresent sales tax;

(g) “Total Base Property Tax” means the real property tax assessed [on behalf of thelocal government] on all lots or parcels in the redevelopment area at the most recentassessment of real property taxes;

(h) “Total Present Property Tax” means the real property tax assessed [on behalf ofthe local government] on all lots or parcels in the redevelopment area at the mostrecent assessment of real property taxes;

(i) “Total Property Tax Increment” means the difference between the total baseproperty tax and the total present property tax; and

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(j) “Total Tax Increment” means the sum of the total property tax increment and thesales tax increment.

‚ The total property tax increment should also constitute the sum of all individual property taxincrements in the redevelopment area.

(4) Tax increment finance may be established only pursuant to a tax increment finance ordinanceadopted pursuant to this Section.

(a) A tax increment finance ordinance shall not be adopted unless the local governmenthas adopted:

1. a local comprehensive plan with a redevelopment area plan pursuant toSection [7-303]; and

2. a redevelopment area ordinance pursuant to Section [14-301].

[(b) A tax increment finance ordinance shall not be adopted unless:

1. redevelopment would not occur in the redevelopment area withoutemploying redevelopment assistance tools as described in theredevelopment area plan; and

2. the redevelopment area plan could not be implemented without taxincrement financing.]

(5) A tax increment finance ordinance pursuant to this Section shall include the followingminimum provisions:



(c) a statement of consistency with the local comprehensive plan, and with theredevelopment area plan in particular, that is based on findings pursuant to Section[8-104];

(d) definitions, as appropriate, for such words or terms contained in the ordinance.Where this Act defines words or terms, the ordinance shall incorporate thosedefinitions, either directly or by reference;

[(e) specific findings, pursuant to the redevelopment area plan, supporting that:

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1. redevelopment would not occur in the redevelopment area withoutemploying redevelopment assistance tools as described in theredevelopment area plan; and

2. the redevelopment area plan could not be implemented without taxincrement financing;]

(f) a description, both in words and with maps, of the limits or boundaries of theredevelopment area pursuant to the redevelopment area plan;

(g) the procedure for review of the determination of individual property tax incrementsor the total property tax increment, pursuant to paragraph (9) below; and

(h) provision that the tax increment finance ordinance shall not become effective untilthe redevelopment area ordinance pursuant to Section [14-301] becomes effective.

(6) A tax increment finance ordinance pursuant to this Section may establish sales tax incrementfinancing.

(a) Before the end of the calendar month in which the tax increment finance ordinancebecomes effective, the local government shall determine the base sales tax.

(b) Every [6] months, commencing with the calendar month directly following themonth in which the tax increment finance ordinance becomes effective, the localgovernment shall:

1. determine the present sales tax;

2. from that number and the base sales tax, calculate the sales tax increment;and

3. deposit the sales tax increment in the special or separate account pursuantto paragraph (10) below within [15] days of the calculation.

(c) If the sales taxes levied by the local government are collected by anothergovernmental unit, that unit shall:

1. at least [15] days before the effective date of the ordinance, be provided bythe local government with a description and map of the boundaries of theredevelopment area pursuant to the redevelopment area plan, and with theeffective date of the tax increment finance ordinance; and

2. make the calculations required by this paragraph every (6) months and remitthe sales tax increment to the local government within [15] days of thecalculation, whereupon the local government shall deposit the increment in

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the special or separate account pursuant to paragraph (10) below within [15]days of receipt.

(7) Upon the request of a local government that is preparing a tax increment finance ordinance,said request including:

(a) a description and map of the boundaries of the redevelopment area pursuant to theredevelopment area plan, with the map delineating the boundaries of the district inrelation to tax parcel boundaries; and

(b) a list of the tax identification numbers for all lots or parcels in the redevelopmentarea,

the county [assessor or equivalent official] shall provide the local government with anenumeration of the total base property tax and all base individual property taxes for theredevelopment area.

(8) Upon the adoption of a tax increment finance ordinance, the local government shall notifythe county [assessor or equivalent official] of such adoption, including the boundaries of theredevelopment area. Thereafter, until the termination of the redevelopment area ordinancepursuant to Section [14-301(5)(m)], the county [assessor or equivalent official] shall, uponeach assessment of property taxes pursuant to [cite real property tax statute]:

(a) determine the present individual property taxes, individual property tax increments,total present property tax, and total property tax increment for the redevelopmentarea.

1. The present individual property taxes for all lots or parcels in theredevelopment area shall be determined in the same manner as for any lotor parcel pursuant to [cite real property tax statute].

2. The county [assessor or equivalent official] shall compare the total propertytax increment to the sum of the individual property tax increments, and shallconfirm that the total property tax increment equals the sum of theindividual property tax increments;

(b) include the amount of the base individual property tax and individual property taxincrement, along with a brief description of tax increment financing andredevelopment, on each real property tax bill for the redevelopment area; and

‚ Taxpayers in the redevelopment area are thus informed of the manner in which their propertytaxes are being spent, and are aware that increases are not going into the general fund butspecifically into the redevelopment of their area.

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(c) remit the total property tax increment to the local government and provide the localgovernment with the data on present individual property taxes, individual propertytax increments, total property present tax, and total property tax increment for theredevelopment area.

(9) Any governmental unit that receives real property tax revenue and/or sales tax revenue fromthe redevelopment area may seek a review by the local legislative body of the determinationof property tax increments and/or sales tax increments, as applicable. The procedure forsuch a review shall conform to the provisions of Chapter [10] of this Act for land-usedecisions, and there shall be a record hearing on all such reviews.

(10) The total tax increment, and all revenue from the sale of bonds or notes secured by total taxincrement pursuant to Section [14-301(6)(a)], shall be deposited in a special interest-bearingaccount of the local government treasury, except as provided below.

(a) If the redevelopment area ordinance is to be implemented by a redevelopmentauthority pursuant to Section [14-301], the total tax increment, and all revenue fromthe sale of bonds or notes secured by total tax increment, may be deposited in aseparate interest-bearing, federally-insured account at a bank.

‚ This provision allows the TIF funds to be deposited in a stable, but privately-owned, institutionif and where the intent is to create a redevelopment authority that has a degree of independencefrom political influence.

(b) Except as provided in paragraph (10)(c) below, the funds deposited into the specialor separate account, and the interest earned thereon, shall be expended only pursuantto the development area plan, as implemented by the development area ordinancepursuant to Section [14-301], to:

1. finance the employment of redevelopment assistance tools and theimplementation of the development area ordinance; and

2. pay principal and interest on bonds or notes issued pursuant to Section [14-301(6)(a)] and secured by the total tax increment.

(c) If a redevelopment area ordinance is terminated pursuant to Section [14-301(5)(m)]and any funds are remaining in the special or separate account at that time, the fundsshall be

Alternative 1remitted to the general fund of the local government treasury.

Alternative 2

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conclusively presumed to constitute property tax increments and sales taxincrements in the proportion in which such funds were deposited into the accountand:

1. to the extent derived from property tax increments, remitted to the county[assessor or equivalent official] and distributed to all governmental unitsthat receive property tax revenue from the redevelopment area in proportionto their real property tax rates; and

2. to the extent derived from sales tax increments, remitted to the general fundof the local government treasury.

Commentary: Tax Abatement

BASICSOne of the most powerful positive tools for affecting public behavior that government has is the

tax system. Deductions, exemptions, and credits exist under the federal and state income tax systemsto encourage or protect particular activities, such as investing, buying a house on mortgage, anddonating to charity. This is no less true for the property and sales tax. In a modern world wherebusiness competes globally and can locate nearly anywhere, lower taxes in a given area can be astrong incentive to locate one’s business or residence there. Therefore, the ability to reduce taxesin a redevelopment area should be considered as a useful method for bringing about the economicresurgence of a depressed area. And tax abatement can be used for other purposes. A tax break forhistoric properties can offset some or all of the cost to the landowner of maintaining their propertyin a historically correct state. Or the developers of residential projects can be encouraged to includeaffordable dwelling units with the prospect of a significant tax break.

Tax abatement can take two basic forms. The simpler method is to apply a lower tax rate. Thiscan apply to property taxes or to sales taxes. The reduction of sales tax rates can be an especiallyeffective tool for the rapid revival of an area’s retail trade. While moving one’s business or residenceis a long-term decision made infrequently, retail purchases are made every day by almost everyperson, and are much more susceptible to immediate change.

The more complex method of abating taxes is the property tax freeze. The assessed valuation ofreal property in the redevelopment area is “frozen” as of a specified date, and real property taxes arelevied against that property according to the assessed value on the specified date instead of thepresent value of the property. Therefore, any increases in the value of real property, whether due tocapital improvements to the particular property or to the general economic improvement of theneighborhood, will not result in a higher tax bill that could act as a disincentive to furtherinvestments or improvement.

In theory, a property tax freeze should not reduce tax revenues, since the increase in propertyvalues in a redevelopment area is attributable to the redevelopment program, including the taxabatement, and would not have occurred in its absence. However, as with tax increment financing

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124There is considerable literature on the subject of the effectiveness of tax incentives. Some useful examplesare Timothy Bartik, Who Benefits from State and Local Economic Development Policies? (Kalamazoo, MI: W.E. UpjohnInstitute for Employment Research, 1991); Roger Wilson, State Business Incentives and Economic Growth: Are TheyEffective? A Review of the Literature (Lexington, KY: Council of State Governments, 1989); Rachel Weber, “Why LocalEconomic Development Incentives Don’t Create Jobs: The Role of Corporate Governance,” Urban Lawyer 32, no. 1(winter 2000): 97; Margaret Dewar, “Why State and Local Economic Development Programs Cause So Little EconomicDevelopment,” Econ. Dev. Q. 12 (1998): 68; and Michael Wolkoff, “Chasing a Dream,: The Use of Tax Abatementsto Spur Urban Economic Development,” Urban Studies 22 (1985):305-315.

125Conn. Gen’l Stat. §8-215 (1999).

126Fla. Stat. §163.2517 (2000).

12765 Ill. Comp. Stat. §5/8-11-20 (1999).


(Section 14-302), there can be a significant difference between theory and reality: if a tax freeze isapplied in an area that would develop and grow without it, then the abatement of property taxesinvolves forgoing an increase in tax revenue that would have occurred anyway. And as with taxincrement financing, this may especially incite resistance from other taxing bodies if a tax freezeapplies to all property taxes in the redevelopment area and not just that of the local governmentinstituting the freeze. And it is not at all clear whether tax abatement commonly results in apermanent increase in economic activity and jobs – it is certainly not unknown for businesses tolocate in an area due to tax incentives but leave when the incentives are no longer available.124 Theseproblems are not pointed out to discourage the use of tax abatement in general, or property taxfreezes in particular, but to encourage the careful consideration and evaluation of their use.

A tool closely related to tax abatement is the payment in lieu of taxes, or PILOT. The owners ofan individual lot or parcel of land agree with the local government that a portion or all of the taxliability for that property will be satisfied by a payment determined by the agreement. The paymentmay take the form of a fixed amount, or may be a percentage of the revenue or profits generated onthe property. The payments are typically less than the property tax they replace, and there is greatercertainty for both the local government and the property owner when the amount due is easilydetermined beforehand.

STATE STATUTESConnecticut125 authorizes municipalities to employ tax abatement for “housing solely for low

or moderate-income persons or families.” The abatement is implemented through individualcontracts between municipalities and the landowners receiving the tax abatement, under which thelandowner must spend an amount equal to the abatement on affordable housing and ceases to receivethe abatement when the housing is no longer set aside for low or moderate-income households.

Florida law126 provides that local governments may exempt sales within “urban infill andredevelopment areas” from the local-option sales surtax upon the application of qualified businesses.

Illinois127 authorizes municipalities to enter into “economic incentive agreements” to share orrebate the retailers’ occupation tax with businesses that are developing vacant or underutilized land

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128Md. Code §9-103 (1999).

129Md. Code §9-229.

130Md. Code §7-501 (2000).

131Md. Code §§7-502, -503, -505, -506, and -506.1.

132Md. Code §7-506.2

133Md. Code §7-504.

134Md. Code §7-504.2.

135Md. Code §7-504.3.

136Ohio Rev. Code §1728.10 (2000).

137Or. Rev. Stat. §§458.005 - 458.065 (1999).


and creating or retaining jobs, where the tax break is necessary to increase the local tax base and/orimprove the commercial sector of the municipal economy.

Maryland requires counties and municipalities to grant a property tax credit to all qualifiedproperty within an enterprise zone.128 It also authorizes them to provide a tax credit, tied directly tothe increase in valuation due to redevelopment (and therefore similar to a “freeze”), to qualifiedbrownfields property.129 Maryland has also authorized the use of payments in lieu of taxes, orPILOT, agreements for leaseholds on government-owned land,130 low-income multifamily rentalhousing in various forms,131 rental housing which becomes tenant-owned or cooperative andpreserves at least 10 percent of the units for low and moderate income tenants,132 land in BaltimoreCity subject to an urban renewal land disposition agreement,133 certain land in Baltimore City’s“Downtown Management District,”134 and certain “economic development projects” in urbanrenewal areas of Baltimore City.135

Ohio136 authorizes the exemption of improvements to property in a locally declared blighted area,up to the full value of the improvements if the affected school districts agree to participate and 75percent of the value if they do not. School districts are expressly authorized to condition theirapproval on entering into a mutually acceptable compensation agreement with the local government.The exemption can last for up to 30 years for residential properties of three units or smaller and 20years for all other property.

Oregon137 authorizes cities to designate, by ordinance, distressed areas, not to exceed 20 percentof the city’s total area, in which qualified single-family dwellings may be extended a real propertytax exemption for up to 10 years. Generally, the tax exemption applies only to the city’s taxes andthe taxes of any governmental body that agrees to the exemption, but the exemption applies to all

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138Texas Tax Code §§312.001 et seq..

139Vt. Stat., tit. 24 §2741 (2000).

140Deluxe Theatres, Inc. v. City of Englewood, 198 Colo. 85, 596 P.2d 771 (1979); 508 Chestnut Inc. v. St.Louis, 389 S.W.2d 823 (Mo. 1965); Visina v. Freeman, 252 Minn. 177, 89 N.W.2d 635 (1958); Dole v. Philadelphia,337 Pa. 375, 11 A.2d 163 (1940).

141Denver Urban Renewal Authority v. Byrne, 618 P.2d 1274 (Colo. 1980); American Linen Supply Co. v. Dep’tof Revenue, 617 P.2d 131 (Mont. 1980); State ex rel. Atkinson v. Planned Industrial Expansion of St. Louis, 517 S.W.2d36 (Mo. 1975); Dayton v. Cloud, 30 Ohio St.2d 295, 285 N.E.2d 42 (1972).


taxes on the exempt property when the taxes of the city and all agreeing governmental units are 51percent or more of the property taxes levied on the property in question.

Texas138 authorizes tax abatement in designated “reinvestment zones.” A reinvestment zone mustbe eligible for federal assistance, and the municipality must find that the area arrests or impairs thesound growth of the municipality, retards the provision of affordable housing, or constitutes aneconomic or social liability. Abatement is extended by taxing bodies to particular property withina reinvestment zone through an abatement agreement, whereby the owner agrees to spend the abatedtaxes on improvements specified in the agreement and to allow the local government to inspect thepremises to ensure the improvements are made. The agreement must also provide for the recaptureof abated taxes if the improvements specified are not made. Abatement agreements cannot extendbeyond ten years, and their adoption or amendment must be approved by a majority of the taxingbody’s governing body. Before a taxing body may enter into abatement agreements, it must adoptguidelines and criteria for such agreements. And before an individual abatement agreement can takeeffect, the local government must notify all other affected taxing bodies of the proposed agreementand hold a hearing to determine whether “the improvements sought are feasible and practical andwould be a benefit to the land to be included in the zone and to the municipality after the expirationof an agreement entered into.”

Vermont139 enables local governments to enter into tax stabilization agreements with the ownersof “agricultural, forest land, open space land, industrial or commercial real and personal propertyand alternate-energy generating plants,” under which assessed values, tax rates, or the total taxpayment can be frozen. The agreements generally cannot last more than 10 years and must beapproved at a town meeting by two-thirds of those present for commercial or industrial property ora majority for other authorized property.

STATE CASE LAWMany if not most state constitutions include a provision mandating uniformity of taxation. The

requirement of uniformity is not absolute, however, and reasonable distinctions and classificationshave generally been upheld against challenges based on uniformity provisions.140 Specifically, statecourts tend to uphold tax exemptions granted against local taxes pursuant to officially approvedredevelopment plans.141

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CONTENTS OF THE MODEL STATUTEThe Section below, 14-303, is intended to operate integrally with the relevant elements of the

local comprehensive plan. For redevelopment, this is the redevelopment area plan pursuant toSection 7-303 and the redevelopment area ordinance under Section 14-301. It is in the plan that thelocal government makes the finding that an area of the local government is underdeveloped or hasdeteriorated, sets the boundaries of the redevelopment area, and makes the general decisions on theappropriate tools for redevelopment in that area. The redevelopment area ordinance – and thisSection – flesh out and implement the policy decisions of the plan. Tax abatement cannot commencebefore the redevelopment area ordinance takes effect, and tax abatement must terminate when thelocal government makes the decision (under Section 14-301) that redevelopment tools are no longerneeded in the area. Similar provisions tie tax abatement for affordable housing to the housingelement of the local comprehensive plan (Section 7-207), and abatement to support historicpreservation is linked to the historic preservation element (Section 7-215).

The Section authorizes the “freezing” of property tax assessed values, the reduction of propertytax rates, and/or the reduction of sales tax rates. As was stated earlier, the freezing of all propertytaxes in a given area or for a particular property may be controversial and objectionable to the othertaxing bodies levying property tax in the freeze area. Therefore, in adopting the Section, a statelegislature must decide whether valuation freezes apply only to the local government’s own propertytax or to all property taxes levied in the freeze area by any taxing body. A related optional provisionfor redevelopment-focused abatement requires, as a prerequisite to a property tax freeze, that thelocal government make specific findings, supported by evidence, that a tax freeze is necessary forthe development of the redevelopment area.

The impact of removing a freeze and suddenly reapplying present valuation could be a sudden“shock” to the economy of the freeze area and a potential setback to the development alreadyachieved. Therefore, the Section authorizes local governments to phase in present assessed valuationat the end of a property tax freeze.

The Section also authorizes the use of payments in lieu of taxes, or PILOTs. As provided below,the local government and a landowner may enter into a development agreement pursuant to Section8-701 whereby the landowner makes payments in lieu of a portion or all of the applicable property.The payment may be a fixed sum, a percentage of the gross profits generated on the premises, somecombination of the two, or any other method chosen by the parties. Since the revenue is a substitutefor general property taxes, the payments in lieu may be applied in whole or in part to the generalfund of the local treasury. This distinguishes PILOTs from tax increment financing pursuant toSection 14-302. The creation of PILOT agreements with multiple taxing bodies as parties isexpressly authorized, so that PILOT arrangements may be applied to property taxes beyond thoseimposed by the local government.

14-303 Tax Abatement

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(1) A local government may adopt and amend in the manner for land development regulationspursuant to Section [8-103 or cite to some other provisions, such as a municipal charter orstate statute governing the adoption of ordinance] a tax abatement ordinance pursuant to thisSection.

(2) The purposes of tax abatement are to:

(a) encourage and foster the redevelopment of economically depressed areas;

(b) reduce the burden of maintaining historically or culturally significant property inproper condition; or

(c) encourage the inclusion of affordable housing units in new and renovateddevelopment; and

(d) provide a practical framework through which the impact of property and/or salestaxes may be reduced in order to achieve the aforementioned purpose.

(3) As used in this Section, and in any other Section where “tax abatement” is referred to:

[(a) “Affected Governmental Unit” mean any governmental unit that levies realproperty tax upon property included in a real property tax freeze pursuant to a taxabatement ordinance.]

(b) “Affordable Housing” means housing that has a sales price or rental amount thatis within the means of a household that may occupy moderate- or low-incomehousing. In the case of dwelling units for sale, housing that is affordable meanshousing in which annual housing costs constitute no more than [28] percent of suchgross annual household income for a household of the size which may occupy theunit in question. In the case of dwelling units for rent, housing that is affordablemeans housing for which the affordable rent is no more than [30] percent of suchgross annual household income for a household of the size which may occupy theunit in question.

(c) “Affordable Housing Cost” means the sum of actual or projected monthlypayments for any of the following associated with for-sale affordable housing units:principal and interest on a mortgage loan, including any loan insurance fees;property taxes and assessments; fire and casualty insurance; property maintenanceand repairs; homeowner association fees; and a reasonable allowance for utilities.

(d) “Affordable Rent” means monthly housing expenses, including a reasonableallowance for utilities, for affordable housing units that are for rent to low- ormoderate-income households.

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(e) “Affordable Sales Price” means a sales price at which low- or moderate-incomehouseholds can qualify for the purchase of affordable housing, calculated on thebasis of underwriting standards of mortgage financing available for the housingdevelopment.

(f) “Freeze Date” means the date, determined in the tax abatement ordinance,whereupon the assessed value of real property shall be employed as the assessedvalue for levying the real property tax [on behalf of the local government] so longas the tax abatement ordinance is in effect;

(g) “Freeze Value” means the assessed value of real property as of the freeze date;

(h) “Low-Income Housing” means housing that is affordable, according to the federalDepartment of Housing and Urban Development, for either home ownership orrental, and that is occupied, reserved, or marketed for occupancy by households witha gross household income that does not exceed 50 percent of the median grosshousehold income for households of the same size within the housing region inwhich the housing is located.

(i) “Moderate-Income Housing” means housing that is affordable, according to the

federal Department of Housing and Urban Development, for either home ownershipor rental, and that is occupied, reserved, or marketed for occupancy by householdswith a gross household income that is greater than 50 percent but does not exceed80 percent of the median gross household income for households of the same sizewithin the housing region in which the housing is located.

(j) “Non-Freeze Value” means the assessed value that would be employed in theabsence of a real property tax freeze.

(k) “PILOT Agreement” means a development agreement, pursuant to Section [8-701], whereby a landowner makes payments in lieu of a portion or all of the realproperty taxes levied on behalf of the local government;

(l) “Real Property Tax” means the tax created by and levied pursuant to [cite realproperty tax statute];

(m) “Real Property Tax Freeze” means the levying of the real property tax [on behalfof the local government] against the freeze value regardless of subsequent increasesin value or improvements to the real property;

(n) “Sales Tax” means the tax created by and levied pursuant to [cite sales tax statuteor statutes].

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(4) Tax abatement may be established only pursuant to a tax abatement ordinance adoptedpursuant to this Section, and a PILOT agreement may be adopted only pursuant to thisSection.

(a) A tax abatement ordinance or PILOT agreement shall not be adopted unless the localgovernment has adopted a local comprehensive plan with:

1. a redevelopment area plan pursuant to Section [7-303], accompanied by aredevelopment area ordinance pursuant to Section [14-301];

2. a historic preservation element pursuant to Section [7-215], accompaniedby a historic preservation ordinance pursuant to Section [9-301]; and/or

3. a housing element pursuant to Section [7-207].

(b) A tax abatement ordinance or PILOT agreement adopted pursuant to:

1. paragraph (2)(a) and (4)(a)1 above shall not employ tax abatement outsidea redevelopment area [and shall not employ a real property tax freeze unlessdevelopment would not occur in the redevelopment area without employinga real property tax freeze as described in the redevelopment area plan];

‚ The optional bracketed provision exists to prevent local governments from abusing itsredevelopment powers by freezing real property taxes where development would occur whethertaxes were frozen or not. The provision may be especially desirable where the legislature decidesto apply property tax freezes to all real property taxes levied in the redevelopment area, by thelocal government and by other taxing bodies.

2. paragraph (2)(b) and (4)(a)2 above shall employ tax abatement only forproperty designated as a historic landmark or within a designated historicdistrict pursuant to Section [9-301]; and

3. paragraph (2)(c) and (4)(a)3 above shall employ tax abatement only forproperty where affordable housing units shall be created, either byconstruction, renovation, or the designation of existing housing units asaffordable housing units.

(5) A tax abatement ordinance may provide for one or more of the following:

(a) a real property tax freeze;

(b) a reduction in the rate levied by the local government under the real property tax;and/or

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(c) a reduction in the rate levied by the local government under the sales tax.

(6) A tax abatement ordinance pursuant to this Section shall include the following minimumprovisions:



(c) a statement of consistency with the local comprehensive plan, and with the:

1. redevelopment area plan and ordinance;

2. historic preservation element and ordinance; or

3. housing element;

in particular, that is based on findings pursuant to Section [8-104];

(d) definitions, as appropriate, for such words or terms contained in the ordinance.Where this Act defines words or terms, the ordinance shall incorporate thosedefinitions, either directly or by reference;

[(e) where the ordinance is adopted pursuant to paragraph (2)(a) and (4)(a)1 andauthorizes a real property tax freeze, specific findings, pursuant to theredevelopment area plan, supporting that development would not occur in theredevelopment area without employing a real property tax freeze;]

‚ This paragraph is included or deleted in conjunction with the optional language of paragraph(4)(b)1 above.

(f) for tax abatement pursuant to paragraphs (2)(a) and (b) and (4)(a)1 and 2, adescription, both in words and with maps, of the limits or boundaries of the propertyeligible for tax abatement. For redevelopment areas, this shall be the boundaries ofthe area pursuant to the redevelopment area plan, and for historic districts orlandmarks it shall be the boundaries of the historic district or landmark pursuant tothe historic preservation element;

(g) procedures for the review of applications for tax abatement, including thedesignation of an officer or body to review and approve applications for taxabatement;

(h) a statement of:

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1. the freeze date, which shall be the effective date of the tax abatementordinance if a separate freeze date is not stated; and/or

2. the reduced tax rate or rates that will be applied;

(i) a requirement that tax abatement pursuant to paragraphs (2)(c) and (4)(a)3 shall notapply to particular property unless and until the owners of the property enter into adevelopment agreement with the local government, pursuant to Section [8-701] andparagraph (10) below, to ensure the continuing availability of affordable housing forsale or rent; and

(j) a provision that a tax abatement ordinance for redevelopment shall not becomeeffective until the applicable redevelopment area ordinance pursuant to Section [14-301] becomes effective and shall terminate upon the termination of the applicableredevelopment area ordinance as provided in Section [14-301(5)(m)]. Notice of saidtermination shall be transmitted in writing, at least [15] days before the effectivedate of the termination, to the county [assessor or equivalent official][ and allaffected governmental units].

(7) A tax abatement ordinance:

(a) may provide that tax abatement shall not apply to particular property unless anduntil the owners of the property enter into a development agreement with the localgovernment, pursuant to Section [8-701], containing reasonable conditions to ensurethat the purposes of this Section and the public policies of the local government areimplemented.

(b) that authorizes a real property tax freeze may include a provision for, upon thetermination of tax abatement, a gradual transition from applying the freeze value toapplying the non-freeze value.

1. The tax abatement ordinance shall specify in detail the nature and methodof the gradual transition.

2. The local government shall notify the county [assessor or equivalentofficial] [and all affected governmental units], in writing and at least [15]days before their effective date, of the provisions of the tax abatementordinance regarding gradual transition, and the county [assessor orequivalent official] shall implement the gradual transition provisions asnotified.

(8) Upon the adoption of a tax abatement ordinance that authorizes a real property tax freeze andits application to particular property pursuant to the ordinance, the local government shallnotify the county [assessor or equivalent official][and all affected governmental units] ofsuch adoption and application, including the boundaries of the affected area and the freeze

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date. Thereafter, until the termination of tax abatement pursuant to paragraph (6)(i) above,the county [assessor or equivalent official] shall:

(a) determine the freeze values of all taxable real property in the affected area;

(b) upon each assessment of property taxes pursuant to [cite real property tax statute],assess and collect the real property tax [of the local government] within the affectedarea by applying the freeze value instead of the non-freeze value;

(c) include the freeze value and the non-freeze value, along with a brief description oftax abatement and the purpose for which it was adopted by the local government,on each real property tax bill for real property in the affected area; and

(d) report annually in writing to the local government [and all affected governmentalunits]:

1. the difference between the real property tax that was collected in the lastyear pursuant to the tax abatement ordinance and the real property tax thatwould have been collected in the last year in the absence of the taxabatement ordinance; and

2. where the tax abatement ordinance provides for a real property tax freeze,the non-freeze value for the affected area as a whole.

(9) A local government may enter into a PILOT agreement as provided in this Section andSection [8-701].

(a) A PILOT agreement may include the abatement of property taxes, and payment inlieu of said taxes, for any governmental unit levying real property tax upon theaffected property that enters into the PILOT agreement with the consent of all otherparties.

(b) A PILOT agreement shall include, in addition to the requirements of Section [8-701], the following minimum provisions:

1. the amount of the real property tax of the local government that is abated bythe agreement, expressed as a percentage of the tax due, a tax rate, anassessed valuation, or some other reasonably clear method;

2. the amount of the payments in lieu of the real property tax abated, includingthe reasonably clear method by which the amount is calculated if it is nota fixed sum;

3. the dates on which the payments are due; and

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4. for a PILOT agreement pursuant to paragraph (2)(c) and (4)(a)3, theprovisions required by paragraph (10) below.

(c) A PILOT agreement may contain other reasonable terms and conditions to ensurethat the purposes of this Section and the public policies of the local government areimplemented.

(d) A copy of the PILOT agreement shall be provided to the county [assessor orequivalent official]. Thereafter, until the termination of the PILOT agreementaccording to its terms and conditions, the county [assessor or equivalent official]shall levy the real property taxes of the local government, and any othergovernmental unit that is a party to the PILOT agreement, according to the termsand conditions of the PILOT agreement.

(10) A development or PILOT agreement pursuant to paragraphs (6)(i) or (10)(b)4 shall includeprovisions to ensure the availability of affordable housing for sale or rent.

(a) The development agreement shall provide for a period of availability for affordablehousing as follows:

1. Newly constructed low- and moderate-income sales and rental dwellingunits shall be subject to affordability controls for a period of not less than[15] years, which period may be renewed pursuant to the developmentagreement;

2. Rehabilitated owner-occupied single-family dwelling units that areimproved to code standard shall be subject to affordability controls for atleast [5] years.

3. Rehabilitated renter-occupied dwelling units that are improved to codestandard shall be subject to affordability controls on re-rental for at least[10] years.

4. Any dwelling unit created through the conversion of a nonresidentialstructure shall be considered a new dwelling unit and shall be subject toaffordability controls as delineated in subparagraph (a) 1 above.

5. Affordability controls on owner- or renter-occupied accessory apartmentsshall be applicable for a period of at least [5] years.

6. Alternatives not otherwise described in this subparagraph shall becontrolled in a manner deemed suitable to the local government and shallprovide assurances that such arrangements will house low- and moderate-income households for at least [10] years.

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(b) In the case of for-sale housing developments, the development agreement shallinclude the following affordability controls governing the initial sale and use andany resale:

1. All conveyances of newly constructed affordable housing dwelling unitssubject to the affordable housing incentives ordinance that are for sale shallcontain a deed restriction and mortgage lien, which shall be recorded withthe county [recorder of deeds or equivalent official]. Any restrictions onfuture resale shall be included in the deed restriction as a condition ofapproval enforceable through legal and equitable remedies.

2. Affordable housing units shall, upon initial sale, and resale in the periodcovered by the development agreement, be sold to eligible low- ormoderate-income households at an affordable sales price and housing cost.

3. Affordable housing units shall be occupied by eligible low- or moderate-income households during the period covered by the developmentagreement.

(c) In the case of rental housing developments, the development agreement shall includethe following affordability controls governing the use of affordable housing unitsduring the use restriction period:

1. rules and procedures for qualifying tenants, establishing affordable rent,filling vacancies, and maintaining affordable housing rental units forqualified tenants;

2. requirements that owners verify tenant incomes and maintain books andrecords to demonstrate compliance with the agreement and with theordinance;

3. requirements that owners submit an annual report to the local governmentdemonstrating compliance with the agreement and with the ordinance.

(d) Where affordable housing is being created by construction or renovation, thedevelopment agreement shall include a schedule that provides for affordable housingunits to be created concurrently with the units that are not subject to affordabilitycontrols.

AGRICULTURAL DISTRICTS

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142The American Farmland Trust, at www.farmland.org, is an excellent clearinghouse of resources onagricultural preservation. A good specific document to examine is American Farmland Trust, Saving AmericanFarmland: What Works (Washington, D.C.: American Farmland Trust, 1997).

143For an early evaluation of differential assessment of farms and open space, see John C. Keene et al.,Untaxing Open Space, prepared for the U.S. Council on Environmental Quality (Washington, D.C. : U.S. GPO, April1976).

144American Farmland Trust, Saving American Farmland: What Works (Washington, D.C.: American FarmlandTrust, 1997), ch. 7 (Agricultural District Programs), 197. The states include Delaware (Del. Code tit. 3, §§901 to 930),Illinois [35 Ill. Comp. Stat. §§200/10-110 to -147 (differential assessment in agricultural districts), 55 Ill. Comp. Stat.§§5/5 -12001, -12007 to -12019 (restriction on county’s power to regulate agricultural uses), 505 Ill. Comp. Stat.§5/1-20.3 (creation of agricultural districts), 740 Ill. Comp. Stat. §§70/0.01 to 5 (limit on nuisance liability for farming)],Iowa (Iowa Code §§335.27, 352.1 to .13), Kentucky (Ky. Rev. Stat. Ann. §262.850), Maryland (Md. Code Ann., Agric.§§2-501 to -516; Tax & Prop. §8-209), Massachusetts (Mass. Gen’l Laws ch. 40L, §§1 et seq.), Minnesota (Minn. Stat.§§40A.01 et seq., 473H.01 et seq.), New Jersey (N.J. Rev. Stat. §§4:1C-1 to -55), New York (N.Y. Agric. & Mkts. Law§§300 to 310), North Carolina (N.C. Gen. Stat. §§106-735 to -744), Ohio (Ohio Rev. Code Ann. §§929.01 to .05),Pennsylvania (3 Pa. Cons. Stat. §§901 to 915), Tennessee (Tenn. Code Ann. §§43-34-101 to -108), Utah (Utah CodeAnn. §§17-41-401 to -406), and Virginia (Va. Code Ann. §§15.1-1506 to -1513, 58.1-3229 to -3252). The entire set ofstatutes may be viewed at: http://www.farmlandinfo.org/fic/laws/kwagdis.html


Commentary: Agricultural Districts142

Agricultural district statutes allow the establishment of special areas where commercialagriculture is encouraged and protected. Land within such areas is then assessed at its use value inagriculture rather than its market or speculative value, a concept called “differential assessment.”143

The theory is that, if land is taxed in this way, it will remove the financial pressure that comes aboutfrom rising land values, particularly on the fringes of metropolitan areas, and from resulting higherproperty taxes on farmland to convert that land to nonagricultural use. Some statutes requirelandowners to enter into agreements that specify minimum periods that land must be retained inagriculture; if land is converted to nonagricultural use before the end of that period, there is apenalty. The statutes may, for example, limit the use of eminent domain in the agricultural districts,prohibit, without the permission of the landowner, special assessments, restrict the ability of localgovernments to regulate agricultural use through zoning or other measures, and provide protectionfor the agricultural landowner against nuisance suits. In some cases, there is a relationship betweenthe establishment of the agricultural district and local comprehensive plans.

STATE STATUTESAccording to the American Farmland Trust, every state provides property relief, in some form

or another, to farmland, and 49 states specifically use differential assessment. Sixteen states haveenacted agricultural district legislation. Two states, Minnesota and Virginia, have two agriculturaldistrict programs each.144

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145Cal. Gov’t Code §51230 (1999). For an excellent review of this act, see Dale Will, “The Land ConservationAct at the 32 Year Mark: Enforcement, Reform, and Innovation,” San Joaquin Agricultural L. Rev. 9 (1999): 1

146Cal. Gov’t Code §51234.

147Cal. Gov’t Code §51244.

148Cal. Rev. & Tax. Code §423 (1999).

149Cal. Gov’t Code §§51283, 51283.1.

150Cal. Gov’t Code §51230.2.

151N.Y. Agric. & Mkts. Law §§301 et seq. (McKinney 1999).


California’s Williamson Land Conservation Act dates from 1965, although it has been amendednumerous times. It allows cities and counties to create agricultural preserves; the minimum sizerequirement for a preserve is 100 acres, but a local government can depart from this minimum ifsupported by the local general plan (the California term for a comprehensive plan).145

Any proposal to establish an agricultural preserve must be submitted to the planning departmentof the county or city having jurisdiction over the land. If the county or city has no planningdepartment, a proposal to establish an agricultural preserve shall be submitted to the planningcommission. Within 30 days after receiving such a proposal, the planning department or planningcommission must submit a report thereon to the board or council. However, the board or councilmay extend the time allowed for an additional period not to exceed 30 days. The report must includea statement that the preserve is consistent with the general plan, and the board or council shall makea finding to that effect. Final action upon the establishment of an agricultural preserve may not betaken by the board or council until the report required by this section is received from the planningdepartment or planning commission, or until the required 30 days have elapsed and any extensiongranted by the board or council has elapsed.146 Landowners who wish to have their agriculturalproperty valued at its use value enter into a contract with the local government; the contracts are fora minimum of 10 years, although the contracts can be extended on an annual basis.147 Once the landis subject to contract, it is valued for agricultural purposes under a “capitalization of income”approach under state law.148 If the contract is cancelled before the end of its expiration date, theowner is obligated to pay the actual deferred taxes as well as a cancellation fee of 12.5 percent ofthe fair market value of the property.149 The California law also contains limitations on the abilityto subdivide contracted lands.150

New York’s statute allows the creation of an agricultural district.151 Land in the district that isused for agricultural production is eligible for an agricultural assessment. Creation of the district isinitiated by property owners, but the county legislative body, after holding a public hearing, andreceiving a recommendation from the county planning board and from a specially-created countyagricultural and farmland protection board, may establish the district. The proposal to establish thedistrict may recommend an appropriate review period of either eight, twelve, or twenty years. The

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152Id., §303.

153Id., §305.

154Id., §305.4.

155Minn. Stat. Ann. §§47H.02 to 47H.18 (1999).

156Minn. Stat. Ann. §47H.04, subd. 1.

157Minn. Stat. Ann. §47H.04, subd. 2. Under the statute, “long-term agricultural land” eligible for designationas an agricultural preserve means land in the metropolitan area designated for agricultural use in local or countycomprehensive plans and which has been zoned specifically for agricultural use permitting a maximum residentialdensity of not more than one unit per quarter/quarter. Id., §47H.0$, sub. 7.

158Minn. Stat. Ann. §47H.05-.06.

159Minn. Stat. Ann. §47H.08.


plan as adopted must, to the extent feasible, include adjacent viable farmlands, and exclude, to theextent feasible, nonviable farmland and non-farmland. The statute requires a review of the proposalby the state commissioner of agriculture and markets, who may modify the proposal, although thecounty legislative body has final authority over the district’s establishment.152 The statute containsdetailed provisions for the valuation of land for agricultural use. If land that received an agriculturalassessment is converted to agricultural use, the land is subject to payments equaling five times thetaxes saved in the last year in which the land benefitted from the agricultural assessment, plus ainterest of six percent a year compounded annually for each year in which an agricultural assessmentwas granted, not exceeding five years.153 The state also contains limitations on the exercise ofeminent domain and the advance of public funds that would adversely affect agriculture.154

One of the Minnesota statutes, the “Metropolitan Agricultural Preserves Act,” applies to theseven-county Twin Cities metropolitan area.155 Local governments in the region must certify to themetropolitan council (the regional planning body for the area) which agricultural lands are eligiblefor designation as agricultural preserves.156 Under the statute, land ceases to be eligible fordesignation as an agricultural preserve when the comprehensive plan and zoning for the area havebeen amended so that the land is no longer planned for long-term agricultural use and is no longerzoned for agricultural use, evidenced by a maximum residential density permitting more than oneunit per 40 acres.157 Owners of certified long term agricultural land may apply to the localgovernment for agriculture assessment and, in so doing, must agree to keep the land in agriculturaluse through a restrictive covenant; the local government forwards the application, once approved,to the county assessor, the county recorder, the metropolitan council, and the county soil and waterconservation district.158 Agriculture preserves continue until either the landowner or the localgovernment initiates expiration. The preserves have a duration of at least eight years.159 The

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162Minn. Stat. Ann. §47H.06, subd. 5.

163Ohio Rev. Code §§929.02 to 929.05 (1999).

164Peterson v. Harrison County, No. 126 / 96-1755 (Iowa Sup. Ct., 1998).

165Iowa Code ch. 352 (1999).


restrictive covenant terminates on the date of expiration.160 The statute limits the ability of localgovernments to regulate agricultural use in the preserves, unless the restriction “bears a directrelationships to an immediate and substantial threat to the public health and safety.”161 The actrequires the metropolitan council to maintain agricultural preserve maps that illustrate certified longterm agricultural lands and lands actually covenanted as agricultural preserves. The council mustmake yearly reports on the agricultural preserves to the state department of agriculture. 162

Ohio allows owners of agricultural land to apply to the county auditor to place the land inagricultural districts for five years. For the previous three years, the land in a proposed district musthave been devoted exclusively to agricultural production and devoted to or qualified for paymentsand other compensation from a federal land retirement or conservation program. The land area mustbe at least ten acres, or the activities conducted on the land must have produced an average yearlygross income of at least $2500 during the three-year period, or the owner must have evidence of ananticipated gross income of that amount from those activities. If the owner withdraws the land fromthe district, then he or she must pay the county auditor a withdrawal penalty. Land in the districtcannot be assessed for sewer, water, or electrical service without permission of the owner. Thestatute provides a defense from civil nuisance actions for certain agricultural activities.163

STATE COURT CASESIn Iowa, the Supreme Court was presented with a case164 in which the owners of agricultural land

were challenging the refusal of a county to include their land in an agricultural district. The Iowastatute165 specifically requires the local government to consider, among other factors, the effect ofthe agricultural district on private property rights in determining the existence and boundaries of thedistrict. Since the Iowa statute affects the right of a landowner to commence a civil action fornuisance, and since objectors to the county claimed that the animal-confinement operation thelandowners operated constituted a nuisance to its neighbors, the court found that it was a legitimateconcern of the county legislative body and a legitimate basis for rejecting the plaintiff’s application.

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166Norquist v. Zeuske, No. 96-1812-OA (Wisc. Sup. Ct. 1997).

167Wis. Stat. §70.32 (1999).

168It is important to note that the average size of an economically viable farm may differ from state to state andindeed from region to region within a state. It is recommended that the most current U.S. Census of Agriculture beconsulted for average farm size when setting the minimum size requirement for parcels or combination of parcels undercommon ownership to be eligible for an agriculture assessment. For a good discussion of this issue, see Robert E.Coughlin, “Formulating and Evaluating Agricultural Zoning Programs,” Journal of the American Planning Association57, No. 2 (Spring 1991): 183-192, esp. 189 (discussion of preferred density at which land use conflicts betweenagricultural activity and nonfarm residential uses will be acceptably low to farmers).


The Wisconsin Supreme Court considered a case166 in which that state’s agricultural districting,specifically the tax provisions,167 were challenged as a violation of the uniformity clause of the stateconstitution. The property tax portions of the statute created a system by which a portion of propertytaxes for qualified agricultural property is based on a “frozen” 1995 valuation and the rest on anagricultural use valuation. As to the uniformity clause, many states have such a constitutionalprovision, which requires the property tax valuation and assessment procedures be uniform for allproperty of the same class. The court found that the constitution requires practical uniformity ratherthan absolute uniformity and that the case was premature. It therefore dismissed the case. The courtfurther stated that “[t]o prove the statute unconstitutional, an owner of agricultural land will haveto (1) satisfy the initial burden by proving that his agricultural land is over assessed and that otheragricultural land is under assessed as a result of the statute, and (2) demonstrate beyond a reasonabledoubt that [the statute] does not create uniform taxation of agricultural land to the extentpracticable.”

THE MODEL STATUTESection 14-401 below is an adaptation of the California, Minnesota New York, and Ohio

agricultural district statutes. Under this model, a local government must have first adopted a localcomprehensive plan that contains an agricultural and forest preservation element. It may then adoptan ordinance establishing an agricultural district, which will be effective for ten years and may bereenacted at the legislative body’s discretion. The ordinance establishing the district must identify,in both mapped and written form, the affected parcels. It must also establish a maximum densityof one dwelling unit per 40 acres in order to create a true agricultural area rather than simply anotherlow-density single-family residential environment.168

Once the agricultural district is established, a landowner whose property is within it may applyto the county assessor for an agricultural assessment, provided the landowner’s property meetscertain minimum area (at least 40 acres) and agricultural production requirements. As part of theinitial application, the owner must record a restrictive covenant that limits the use of the propertyto agriculture for a period of nine years. If the application is granted, the land is assessed at itsagricultural rather than its market value, and may not be subject to special assessments for water,sewer, streetlights, and sidewalks, without the owner’s permission.

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Certain procedures must be followed before eminent domain (for acquisition of more than tenacres) can be used or expenditure of public funds, by grant, loan, interest subsidy, or otherwise, forthe construction of nonfarm housing, or commercial or industrial facilities to serve nonagriculturaluses of land can occur within the district. Local governments are barred from enacting ordinancesthat unreasonably restrict or regulate normal farm structures or agricultural use or practices, unlessthe restriction or regulation bears a direct relationship to an immediate and substantial threat to thepublic health or safety. The model provides a defense from civil nuisance actions for agriculturalactivities conducted on land within an agricultural district.

If the land that has been granted an agricultural assessment is converted to nonagricultural usebefore the nine-year period has lapsed (conversion includes subdivision for nonfarm uses), theowner, or his or her successor, is liable for a penalty equal to five times the taxes saved during thepast year (the difference between the taxes that would have been collected if the land had beenassessed at its market value and its agricultural value), interest for each year the agriculturalassessment has been in effect, up to five years, and any uncollected special assessments. If thedistrict is terminated or not reenacted by the local government, if land is removed from the district,such as by amendment, or if land is acquired through eminent domain, there are no requiredpayments and penalties on the part of the landowner. The model statute requires the landowner tonotify the county assessor if conversion takes place.

14-401 Agricultural Districts; Use Valuation of Agricultural Land

(1) The legislative body of a local government may adopt and amend in the manner for landdevelopment regulations pursuant to Section [8-103 or cite to some other provision, such asa municipal charter or state statute governing the adoption of ordinances] an ordinanceestablishing an agricultural district.

(2) The purposes of an agricultural district ordinance are to:

(a) implement the agricultural and forest preservation element of the localcomprehensive plan;

(b) encourage landowners to make a long-term commitment to agriculture by offeringthem financial incentives and security of land use;

(c) protect land within such districts from the imposition of certain special assessments;and

(d) protect land within such districts from acquisition through eminent domain.

(3) As used in this Section:

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(a) “Agricultural District” means a contiguous area of at least [100] acres in sizecreated under this Section within which parcels of land shall be eligible forassessment for agricultural use and other benefits and protections;

(b) “Agricultural Use” means the employment of land for the primary purpose ofobtaining a profit in money by raising, harvesting, and selling crops, or feeding(including grazing), breeding, managing, selling, or producing livestock, poultry,fur-bearing animals, or honeybees, or by dairying and the sale of dairy products, byany other horticultural, floricultural, viticultural use, by animal husbandry, or by anycombination thereof. It also includes the current employment of land for the primarypurpose of obtaining profit by stabling or training equines including, but not limitedto, providing riding lessons, training clinics, and schooling shows. Wetlands, pastureand woodlands accompanying land in agricultural use shall be deemed to be inagricultural use;

(c) “Conversion to Non-Agricultural Use” means one or more of the following:

1. the explicit removal of land from an agricultural district by petition of thelandowner to the local government that established the district;

2. conversion of land in an agricultural district to use for purposes other thanagricultural production, including subdivision for nonfarm-related housing,or commercial or industrial land use, but excluding those uses exempted bysubparagraph (4)(f)2 below; and

3. withdrawal of land from a land retirement or conservation program forpurposes other than agricultural production;

(d) “Covenant” means a real covenant or conservation easement initiated by the ownerand contained in the application provided for in paragraph (7) below, whereby theowner places limitations on specified land and receives protections and benefits asprovided in this Section; and

(e) “Family” means persons related by blood, adoption, or marriage.

(4) An agricultural district ordinance shall be adopted and amended pursuant to this Section andshall:

(a) be adopted or amended by the legislative body of a local government only after ithas adopted a local comprehensive plan that includes the elements required bySection [7-202(2)] and that also includes an agriculture and forest preservationelement as authorized by Section [7-212];

(b) contain a description of the district, which shall include tax map identificationnumbers for all parcels within the district, and a map delineating the exterior

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169See Arthur C. Nelson, “Preserving Prime Farmland in the Face of Urbanization,” Journal of the AmericanPlanning Association 58, No. 4 (Autumn 1992): 467-488.


boundaries of the district in relation to tax parcel boundaries and the tax parcelscontained within the district;

(c) include a statement of consistency with the local comprehensive plan, and with theagricultural and forest preservation element in particular, that is based on findingspursuant to Section [8-104];

(d) include definitions, as appropriate, for such words or terms contained in theordinance. Where this Act defines words or terms, the ordinance shall incorporatethose definitions, either directly or by reference;

(e) be effective for a period of [10] years from the date of enactment, and may bereenacted for additional periods of [10] years; and

(f) include amendments to the zoning ordinance, applicable to all land within thedistrict, that:

1. limit the density to one dwelling unit per [40] acres; and

2. prohibit commercial and industrial land uses, except as follows:

a. storage use of farm buildings that does not disrupt the integrity ofthe agricultural district;

b. commercial use of farm buildings for trades not disruptive to theintegrity of the agricultural district, such as carpentry shops, smallscale mechanic shops, and similar activities that a farm operatormight conduct;

c. farm markets that sell agricultural products that are produced by theseller on the premises from which they are sold; and

d. [other].

(5) An agricultural district shall:

(a) not include any land that is contained in an urban growth area; and169

(b) include not less than [80] percent of its area in agricultural use.

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(6) Upon adoption of an agricultural district ordinance, the clerk of the local government shall,within [30] days, certify a copy of the ordinance to the county [assessor or equivalentofficial], to the [state planning agency], and to the state department of agriculture.

(7) (a) Any owner of land used in agricultural production within an agricultural districtshall be eligible to apply for an agricultural assessment, effective for [9] years.

1. An agricultural assessment shall be granted only upon an application by theowner of such land on a form prescribed by the state [tax commissioner orother official]. The applicant shall furnish to the county [assessor] suchinformation as the state [tax commissioner or other official] shall require,including classification information prepared for the applicant's land orwater bodies used in agricultural production by the soil and waterconservation district office within the county, and informationdemonstrating the eligibility for agricultural assessment of any land used inconjunction with rented land.

2. Such application shall be filed with the county [assessor] on or before theappropriate taxable status date.

3. If an applicant rents land from another for use in conjunction with theapplicant's land for the production for sale of crops, livestock or livestockproducts, the gross sales value of such products produced on such rentedland shall be added to the gross sales value of such products produced onthe land of the applicant for purposes of determining eligibility for anagricultural assessment on the land of the applicant.

(b) Land for which an agricultural assessment is sought:

1. shall have been devoted exclusively to agricultural production, or devotedto or qualified for payments or other compensation from a federal landretirement or conservation program, for the previous three years;

2. shall have produced an average yearly gross income of at least $[5,000]during that previous three-year period; and

3. shall total at least [40] acres, provided, however, that two or morecontiguous parcels of land may be combined to meet this minimum arearequirement if they are in common ownership or if they are ownedseparately by members of the same family.

(c) The application shall include a covenant by the owner, binding on the owner and theowner's successors or assignees and running with the land, that the land shall be keptin agricultural use for a period of [9] years from the date of application. Such

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covenant shall be recorded with the county [recorder of deeds or equivalent official]within [15] days of the approval of the application.

(d) If the county [assessor] is satisfied that the application meets the requirements of thisSection and that the applicant is entitled to an agricultural assessment, the [assessor]shall approve the application and the land shall be assessed pursuant to this Section.

1. Not less than ten days prior to the date for hearing complaints in relation toassessments, the [assessor] shall mail to each applicant, who has includedwith the application at least one self-addressed, pre-paid envelope, a noticeof the approval or denial of the application. Such notice shall be on a formprescribed by the state [tax commissioner or other official] which shallindicate the manner in which the total assessed value is apportioned amongthe various portions of the property subject to agricultural assessment andthose other portions of the property not eligible for agricultural assessmentas determined for the tentative assessment roll and the latest finalassessment roll.

2. Failure to mail any such notice or failure of the owner to receive the sameshall not prevent the levy, collection and enforcement of the payment of thetaxes on such real property.

(e) The county [assessor] shall keep a record of all land in the county that is within anagricultural district and that has been granted an agricultural assessment pursuantto this Section.

(f) Any time after [90] days before an agricultural assessment is due to terminate, theowner of land in the agricultural district that has been granted an agriculturalassessment may file a renewal application to continue the agricultural assessmentof that land for a period of [9] years.

1. The requirements for continuation of the agricultural assessment and therenewal application procedure shall be the same as those required for theoriginal application for agricultural assessment. An application for renewalof an agricultural assessment shall be denied on the grounds of theimminent termination of the agricultural district only where the district isdue to terminate within one year.

2. The county [assessor] shall notify owners of land granted an agriculturalassessment within [90] days of the termination of the agriculturalassessment of the necessity of filing a renewal application to continuevaluing the land at agricultural use value. If the owner has not filed arenewal application within [30] days of the termination of the agriculturalassessment, the [assessor] shall forthwith notify such owner by certifiedmail that unless a renewal application is filed within the next [15] days, the

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land will be removed from agricultural assessment upon its terminationdate.

3. An approved renewal application is effective on the termination date of thepreceding agricultural district. Failure of an owner to file a renewalapplication within [15] days preceding the termination of the owner'sagricultural assessment shall not prevent the owner from filing anapplication for an agricultural assessment.

(g) Land that is transferred to a new owner during the period in which the land is in anagricultural district and has been granted an agricultural assessment shall continueto receive the agricultural assessment unless the new owner elects to discontinueagricultural use of the land and files the election with the county [assessor] withinsixty days after the transfer. Failure of the new owner to continue agricultural usefor the duration of the period specified in the covenant is subject to the paymentsand penalties required by paragraph (9) below.

(8) All land within an agricultural district that has been granted an agricultural assessmentpursuant to this Section shall be valued solely with reference to its appropriate agriculturalclassification and value. In determining the value for ad valorem tax purposes, the county[assessor] shall not consider any added value resulting from nonagricultural factors. [Addother language specifying the manner in which agricultural value is to be determined asappropriate.]

(9) (a) Except as provided in subparagraph (9)(f) below, if land within an agriculturaldistrict which received an agricultural assessment is converted to nonagricultural usebefore the end of the duration of the covenant, it shall be subject to paymentsequaling:

1. [five] times the taxes saved in the last year in which the land benefittedfrom an agricultural assessment;

2. any uncollected special assessments; and

3. interest of [6] percent per year on the above, compounded annually for eachyear in which an agricultural assessment was granted, not exceeding fiveyears.

(b) The amount of taxes saved for the last year in which the land benefitted from anagricultural assessment shall be determined by applying the applicable tax rates tothe excess amount of assessed valuation of such land over its agricultural assessmentas set forth on the last assessment roll which indicates such an excess.

1. If only a portion of a parcel as described on the assessment roll is converted,the assessor shall apportion the assessment and agricultural assessment

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attributable to the converted portion, as determined for the last assessmentroll for which the assessment of such portion exceeded its agriculturalassessment.

2. The difference between the apportioned assessment and the apportionedagricultural assessment shall be the amount upon which payments shall bedetermined.

3. Payments shall be added by or on behalf of each taxing jurisdiction to thetaxes and special assessments levied on the assessment roll prepared on thebasis of the first taxable status date on which the assessor considers the landto have been converted; provided, however, that no payments shall beimposed if the last assessment roll upon which the property benefitted froman agricultural assessment, was more than five years prior to the year forwhich the assessment roll upon which payments would otherwise be leviedis prepared.

(c) Whenever a conversion to nonagricultural use occurs, the landowner shall notify thecounty assessor in writing within [90] days of the date such conversion iscommenced. If the landowner fails to make such notification within the [90]-dayperiod, the assessor shall impose a penalty on behalf of the assessing unit of up totwo times the total payments owed, but not to exceed a maximum total penalty of$[500] in addition to any payments owed.

(d) A county [assessor] who determines that there is liability for payments and anypenalties assessed pursuant to subparagraph (a) above shall notify the landowner bymail of such liability at least ten days prior to the date for hearing complaints inrelation to assessments. Such notice shall indicate the property to which paymentsapply and describe how the payments shall be determined. Failure to provide suchnotice shall not affect the levy, collection or enforcement or payment of payments.

(e) Liability for payments shall be subject to administrative and judicial review asprovided by law for review of assessments.

(f) Land that is deemed converted to nonagricultural use by:

1. action of eminent domain by a governmental unit;

2. termination of the agricultural district;

3. denial of an application for agricultural assessment, or for renewal ofagricultural assessment, on the grounds of imminent termination of theagricultural district; or

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4. removal from the agricultural district by action of the local governmentalthat established the district;

shall not liable for payments and penalties under this paragraph, and the covenantmay be terminated by the owner at any time after the conversion by filing adocument to that effect with the county [recorder of deeds or equivalent official].

(10) (a) No governmental unit with authority to levy special assessments on real propertyshall collect an assessment for purposes of:

1. sewer, water, or streetlight systems,

2. sidewalks, or

3. [other];

on real property that is within an agricultural district and that is subject to anagricultural assessment pursuant to this Section without the permission of the owner,except that any assessment may be collected on a lot surrounding a dwelling or otherstructure not used in agricultural production that does not exceed one acre.

(b) For each special assessment levied for the purposes described in subparagraph(10)(a) by a governmental unit on real property within an agricultural district, thecounty assessor shall make and maintain a list showing:

1. the name of the owner of each parcel of land that is exempt from thecollection of the special assessment under this Section;

2. a description of the exempt land;

3. the purpose of the special assessment; and

4. the amount of the uncollected assessment on the exempt land.

The recording of the assessments does not permit the collection of the assessmentsuntil such time as exempt lands are converted to nonagricultural use.

(11) Except as provided in this paragraph, no entity possessing power of eminent domain underthe laws of this state, whether a governmental unit or a corporation, shall acquire any landor easements having a gross area greater than [10] acres in size within agricultural districts.Except as provided in this paragraph, no governmental unit shall advance public funds,whether by grant, loan, interest subsidy, or otherwise, within an agricultural district for theconstruction of nonfarm housing, or commercial or industrial facilities to servenonagricultural uses of land.

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(a) At least [60] days prior to such an acquisition or advance, notice of intent shall befiled with the director of the [department of agriculture] containing information andin the manner and form required by the director. The notice of intent shall containa report explaining the proposed action, including an evaluation of alternativeswhich would not require acquisition or advance within agricultural districts.

(b) The director, in consultation with affected units of government, shall review theproposed action to determine the effect of the action on the preservation andenhancement of agriculture and agricultural resources within agricultural districtsand the relationship to local and regional comprehensive plans.

(c) If the director finds that the proposed action might have an unreasonable effect onan agricultural district, the director shall issue an order within the [60]-day periodfor the party to desist from such action for an additional [60]-day period.

(d) During the additional [60]-day period, the director shall hold a public hearingconcerning the proposed action at a place within the affected agricultural district orotherwise easily accessible to the agricultural district. The director shall providenotice of the hearing within [30] but not less than [15] days before the hearing:

1. in a newspaper having a general circulation within the area of theagricultural district;

2. in writing delivered by mail, to the local governments whose territoryencompasses the agricultural district;

3. in writing delivered by mail, to the entity proposing to take the action; and

4. in writing delivered by mail, to any governmental unit having the power ofreview or approval of the action.

(e) The review process required by this paragraph may be conducted jointly with anyother environmental impact review required by law.

(f) The director shall be empowered to suspend for up to [1] year any eminent domainaction which he or she determines to be contrary to the purposes of this Section andfor which he or she determines there are feasible and prudent alternatives whichhave less negative impact on agricultural districts.

(g) The director may request the attorney general to bring a civil action to enjoin anygovernmental unit or corporation from violating the provisions of this paragraph.

(h) This paragraph shall not apply to:

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1. any utility facilities, including, but not limited to, electric transmission ordistribution facilities or lines, facilities used for exploration, production,storage, transmission, or distribution of natural gas, synthetic gas, or oil, ortelephone lines and telecommunications facilities; or

2. any emergency project that is immediately necessary for the protection oflife and property.

(12) Except as provided in this Section, a local government shall be prohibited from enacting orenforcing land development regulations, or other ordinances or regulations, within anagricultural district that would, as adopted or applied, unreasonably restrict or regulatenormal farm structures or agricultural use or practices, unless the restriction or regulationbears a direct relationship to an immediate and substantial threat to the public health orsafety. This prohibition shall apply to the operation of farm vehicles and machinery, the typeof farming, and the design of farm structures, exclusive of residences.

(13) In a civil action for nuisance involving agricultural activities, it is a complete defense if:

(a) the agricultural activities were conducted within an agricultural district;

(b) agricultural activities were established within the agricultural district prior to theplaintiff's activities or interest on which the action is based;

(c) the plaintiff was not involved in agricultural production; and

(d) the agricultural activities were not in conflict with federal, state, and local laws andrules relating to the alleged nuisance or with generally accepted agriculturepractices.

The plaintiff may offer proof of a violation independently of any proof of violation orconviction provided by any public official.

NOTE 14 – A NOTE ON ELEMENTARY AND SECONDARY PUBLIC SCHOOL FINANCE AND ITS RELATION TO PLANNING

By Michael Addonizio, Associate Professor of Education, Wayne State University, Detroit, Michigan

Local land-use planning decisions affect public schools and school finance in several ways.First, these local decisions influence the location, construction, and reuse of school buildings. Localcomprehensive plans include population projections that can be used to identify the growth in schoolage populations. These plans also include locational criteria for school sites. Further, localcomprehensive plans may identify schools that need rehabilitation or closing and reuse of the

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170Norman Williams, Jr.., “Halting the Race for ‘Good Ratables” and Other Issues in Planning LegislationReform,” in Modernizing State Planning Statutes: The Growing SmartSM Working Papers, Vol. 1, Planning AdvisoryService Report 462 (Chicago: American Planning Association, 1996): 57-61.


building or site. School closings and school building demolitions are particularly controversial. Inmany communities, public schools are centers of community activity and symbols of communityidentity. School buildings may have historical or architectural significance.

A second connection between land use and public schools involves the approval of schoolfacility construction. Such approval is often given through a conditional use permit issued by a localgovernment (e.g., planning commission, board of zoning appeals, or legislative body) following apublic hearing.

Finally, because local governments rely on the property tax (and, to a lesser extent, sales tax)to finance local public services, including schools, they often design their land use controls to attract“good ratables;” that is, those types of land use that raise a lot of property tax revenue while creatinglittle need for additional public services. Examples include commercial and industrial facilities andexpensive single-family homes. At the same time, land use for “bad ratables” that generate little taxrevenue and substantial demand for public services (for example, low- and moderate-cost housing)is often discouraged.170

An inevitable result of this local competition for “good ratables” is the enormous disparities inthe fiscal capacity of local communities to support public education. That is, new investment willseek those local communities with great taxable wealth and correspondingly low tax rates, whilelow-wealth communities struggle with high rates to finance basic services, including public schools.In view of the importance we attach to education in preparing our children for citizenship andeconomic participation, such disparities seem unfair and undemocratic. These concerns, which havebeen the subject of considerable political and judicial activity, have led states to pursue schoolfunding systems that seek to neutralize these disparities.

This research note summarizes the development of contemporary law and policy governing thefinancing of public elementary and secondary schools in the United States. The note examines theworkings of the basic models and methods used by states to fund both school operations and capitalprojects and analyzes landmark litigation that gave rise to these state programs. As such, this noteis intended to be a concise reference for policymakers at all levels of government, includinggovernors and legislators, their staffs, and other state and local officials with responsibilities relatedto a wide array of public issues, including planning, economic development, housing, transportation,community revitalization, and the environment. Clearly, the quality of our public school systemsis a matter of paramount importance to the public and their elected and appointed leaders. Anunderstanding of the financing of those systems may inform our work in other parts of the publicsector.

SCHOOL FINANCE: A BRIEF HISTORYThe idea of free, tax-supported schools did not gain stature in the United States until the

nineteenth century. American schools began as local entities, largely private and religious during

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171Government financing of schools began in Massachusetts in 1647, when the state’s General Court passed thefamous Old Deluder Satan Act, which required every town to set up a school or pay a sum of money to a larger townto support education. The act required towns with at least so families to appoint a teacher of reading and writing, andrequired towns with more than 100 families to also establish a secondary school. The Act required that there schoolsbe supported by masters, parents, or local citizens, thereby providing for the financing of schools through local taxation.The first local property tax for schools was levied in Dedham, Massachusetts, in 1648. John D. Pulliam, History ofEducation in America, 4th ed. (Columbus, Ohio: Merrill, 1987).


the seventeenth, eighteenth and early nineteenth centuries. As in England, educating children wasconsidered a private matter, the responsibility of families, not government. The eighteenth centuryleaders of the new republic considered education as a means to prepare citizens to activelyparticipate in democratic government and exercise the liberties guaranteed by the Constitution.However, while Thomas Jefferson advocated the creation of free elementary schools, his proposalwas not adopted on a statewide basis until the mid-nineteenth century, when Horace Mann andHenry Barnard, state superintendents of Massachusetts and Connecticut, respectively, led efforts toestablish publicly-supported “common schools.”171

From the mid-seventeenth through mid-eighteenth centuries, one-room elementary commonschools were established in local communities, generally supported by a small local tax. Eachlocality operated independently, since there were no state laws or rules governing public education.At the same time, several large school systems evolved in the big cities of most states. As early asthe seventeenth century, these local educational systems reflected differences in the local ability tosupport them. Big cities were generally quite wealthy, while the small, rural systems were quitepoor and had great difficulty supporting a one-room school.

As the number of local school systems grew and education came to be viewed as an essentialunifying force for the growing republic, political and educational leaders sought to establish stateeducational systems. By 1820, 12 of the then 23 states had constitutional provisions, and 17 hadstatutory provisions, regarding education. In some states, new constitutional articles not onlymandated the creation of statewide systems of public education, but assigned governmentresponsibility for the financing of public schools.

The creation of state-controlled and publicly financed “common schools” raised manyfundamental issues of school finance, including the relative roles of state and local government insupporting pubic schools and whether funding levels should be substantial and at least roughly equalacross local districts. Specifically, questions arose regarding the meaning of new constitutionalphrases such as “general and uniform,” “thorough and efficient,” “basic,” or “adequate,” words andphrases appearing in the education clauses of many state constitutions. Did such language requireequal per pupil spending for every pupil in the state or merely a basic educational program for everychild, with local per pupil spending determined locally? These issues persist today and have beenresolved in different ways across the states.

In the mid-to-late 1800s, most states required local school districts to fund their public schoolsentirely with local property taxes. At the same time, however, when states determined local districtboundaries, the districts often varied enormously in their local property wealth per pupil and, thus,in their ability to raise school revenue. Property-rich districts were able to support relatively high

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172A. Wise, Rich Schools–Poor Schools: A Study of Equal Educational Opportunity (Chicago: University ofChicago Press, 1969).

173 J. Coons, W. Club, and S. Sugarman , Private Wealth and Public Education (Cambridge, Mass.: BelknapPress of Harvard University Press, 1970).


per pupil spending with relatively low tax rates while the opposite was true for property-poorcommunities. School finance policy throughout the twentieth century has attempted to address thesefiscal inequities. While some writers and policymakers focused on local spending differences perse,172 most policy debate addressed the dependence of local school revenue on local propertywealth.173

(1) Flat Grant Programs. By the mid-nineteenth century, the inequities arising from locally-financed public schools, including the inability of some poor localities to finance any public school,led states to provide a lump-sum or flat grant, usually on a per school basis, to help support theirlocal elementary school. However, while this approach guaranteed every locality some resourcesfor public schools (including those that raised no local resources) and increased overall support forpublic schools, the flat-grant approach made no distinction among districts; rich and poor alike allreceived equal state support.

As school enrollments grew, states increased their levels of support and changed from school-based to classroom, and eventually pupil-based or teacher-based grant formulas. By the turn of thecentury, the dramatic growth of public school enrollments had rendered flat grant formulas veryexpensive and required substantial state payments to relatively affluent communities. Consequently,rising levels of state school aid failed to measurably reduce the funding inequities in states with localdistricts of varying levels of per pupil property wealth.

(2) Foundation Programs. As the shortcomings of flat-grant aid formulas became evermoreapparent by the start of the twentieth century, researchers and policymakers sought a more effectiveway to reduce inequities in public school finance. As ingenious solution was devised by GeorgeStrayer and Roger Haig, professors at Columbia University, whose proposed formula would cometo dominate public school finance throughout the twentieth century.

The Strayer-Haig (or “minimum”) foundation program was designed to assure all local districtsof a level of resources sufficient to provide an educational program of minimally acceptable quality.Flat grants failed in this regard because of their low levels resulting from the spread of state aidacross all local districts, rich and poor alike. The foundation formula solved this problem byfinancing the per pupil spending target through a combination of state and local revenue. That is,the foundation program requires the levy of a minimum local tax rate as a condition of receivingstate aid. The required tax rate is applied to the local tax base. The state foundation grant is equalto the difference between the state’s foundation per pupil revenue level and the local per pupilrevenue raised by the required tax rate.

The genius of the Strayer-Haig foundation formula is its substitution of local revenue for stateaid in relatively wealthy districts, thereby allowing greater state support for property poor districts.This substitution allowed for a substantial increase in minimum per pupil spending over flat-grant

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174As noted by Odden and Picus, states have differed in their approach to the local contribution.Though mostdistricts levy a tax rate at or above the minimum required local rate, a few do not. A policy issue for states is whetherto impose the minimum rate on such districts or reduce their state foundation aid. The difficulty with such draconianstate measures arises from the fact that many of these low-tax districts are also quite poor, with low property wealth andlow income. Generally, states have not enforced the minimum tax in these districts. Rather, some states (e.g., New Yorkand Michigan) make full foundation aid payments to districts regardless of local tax effort. In this way, low-tax districtssustain only a local revenue loss. Other states (e.g., Texas) reduce state foundation aid in the same proportion that thelocal tax rate falls below the designated minimum rate. See A. Odden and L. Picus, School Finance: A PolicyPerspective, 2d ed. (Boston: McGraw Hill, 2000).

175Richard Salmon, Christina Dawson, Stephen Lawton, and Thomas Johns, Public School Finance Programsof the United States and Canada: 1986-87 (Sarasota, Fl.: American Education Finance Association, 1988).

176Steven D. Gold, David M. Smith, and Stephen Lawton, Public School Finance Programs of the United Statesand Canada: 1993-94 (New York: Center for the Study of the States, the Nelson A. Rockefeller Institute of Government,and the American Education Finance Association, 1995). In a widely-heralded school finance reform effort, Michiganadopted a foundation funding system in 1994-95. For an analysis of this reform, see M. Addonizio, C.P. Kearney, andH.J. Prince, “Michigan’s High Wire Act,” Journal of Education Finance 20 (Winter 1995): 235-269.


formula levels and emphasized the importance of a coordinated state and local partnership infunding public schools. Thus, a foundation aid formula has several attractive attributes. First, itfinances a minimum educational program in every district. Second, it provides general aid in inverserelation to local district property wealth (that is, the formula equalizes local fiscal capacity). Third,it requires a local contribution.174

At the time of its introduction in the early twentieth century, the foundation program was a majorpolicy innovation that enabled states to implement a finance system that could substantially improveeducational programs in the previously lowest-spending districts. That is, even the poorest ofdistricts could offer at least a minimally adequate educational program. In 1986-87, 30 states hada foundation funding structure175 and by 1993-94 the number had risen to 40.176

The current popularity of the foundation approach evolved with progress in education research,judicial challenges to state school finance structures, and state legislation. The next section willexamine major judicial and legislative reforms that have shaped the landscape of our current schoolfinance systems.

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177E.P. Cubberly, School Funds and Their Apportionment (New York: Teachers College Press, 1905).

178McInnis v. Shapiro, 293 F.Supp. 327 (N.D.Ill.1968), affirmed sub nom. McInnis v. Ogilvie, 394 U.S. 322,(1969), and Burruss v. Wilkerson, 310 F.Supp. 572 (W.D.Va.1969), affirmed 397 U.S. 44 (1970).

179J. Coons, W. Clune, and S. Sugarman, Private Wealth and Public Education (Cambridge, Mass.: BelknapPress of Harvard University Press, 1970).


MODERN REFORMS IN SCHOOL FINANCE DUE TO LITIGATIONDifferences across local school districts in per pupil expenditures, generally arising from

differences in local taxable wealth, have been a concern for most states for the past century.177

During this time, issues of equity and adequacy have received much attention from educators andpolicymakers and became the subject of litigation and resultant finance reforms starting in the late1960s. In this policy area, equity refers to the elimination or diminution of the relationship betweenlocal wealth and local per pupil spending, while adequacy refers to the availability in every localdistrict of per pupil spending that is sufficient to bring students to minimally acceptable levels ofachievement. Such levels are generally established by the state.

Contemporary school finance litigation dates back to the late 1960s, when suits were filed inIllinois and Virginia challenging the constitutionality of spending differences across local districts.178

In each case, plaintiffs argued that the finance systems were unconstitutional because education wasa fundamental right and the wide differences in local school spending were not related to differencesin educational need. Rather, spending differences arose from differences in local taxable wealth.However, when plaintiffs were unable to provide the court with a standard by which to identify andmeasure “educational need,” both courts ruled that the suits were non-justiciable and dismissedplaintiffs’ claims. To succeed in future litigation, plaintiffs needed to develop a standard with whichthe courts could assess plaintiffs’ claims – that state school funding systems failed to meet therequirements of equal protection.

In the late 1960s, Northwestern University law professor John Coons and two students, WilliamClune and Stephen Sugarman, formulated a theory that local school districts were creations of stategovernment and that by creating a funding system that was heavily dependent on local tax revenue,states were denying local districts equal opportunity to raise school revenue. In so doing, states werecreating a suspect classification defined by district per pupil property wealth.179 By this argument,a state school finance system that resulted in unequal per pupil funding across districts would besubject to “strict judicial scrutiny.” That is, the state would be required to demonstrate a“compelling state interest” for its finance system and that “no less discriminatory” policy is availableto the state to serve that compelling interest. When courts invoke this test, states are generallyunable to make these demonstrations and, therefore, lose the case.

Coons, Clune, and Sugarman argued that systems of school finance should be “fiscally neutral,”that is, per pupil revenue in a local district should not be related to the wealth of that local district.Rather, it should be related to the wealth of the state as a whole. This standard of fiscal neutrality,moreover, was easily applied. One need only measure the statistical relationship between local per

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180Serrano v. Priest, 5 Cal.3d 584, 487 P.2d 1241, 96 Cal.Rptr. 601 (1971).

181San Antonio Independent School District v. Rodriquez, 411 U.S. 45 (1973), rehearing denied by 411 U.S. 959(1973).


pupil property wealth and local per pupil revenue within the state. Further, as demonstrated below,a fiscally neutral state school finance formula could be devised with relative technical (if notpolitical) ease.

Thus, this new strategy rested upon two arguments: first, that education is a fundamental rightand second, that local property wealth per pupil is a suspect class. At the time, neither argument hadbeen accepted by the courts. The second argument was particularly controversial, since thecharacteristic pertained not to individuals, as all previous suspect classes had, but to a governmentalunit.

The first case filed using this strategy was Serrano v. Priest in California.180 The case was filedin 1968 and defendants immediately moved to dismiss, claiming that school finance cases were non-justiciable, and relying on two earlier federal cases, McInnis v. Shapiro and Burrus v. Wilkerson.The trial court dismissed the case on that basis and plaintiffs appealed to the California SupremeCourt. Relying on both the Fourteenth Amendment to the U.S. Constitution and the equal protectionclause of the California constitution, the California Supreme Court ruled that: (1) the case wasjusticiable and the standard of fiscal neutrality applied; (2) education is a fundamental right andproperty wealth per pupil is a suspect class; and (3) if the facts were as alleged, California’s schoolfinance system was unconstitutional. This precedent-setting opinion, rendered in August 1971,commanded national attention and triggered similar court challenges in other states. It also led toCalifornia’s adoption of a guaranteed tax base (GTB) school aid system, described below.

One landmark case following closely upon Serrano was San Antonio School District v.Rodriguez181 in Texas. Significantly, this case was filed in federal court and heard initially by athree-judge district court panel. The panel found for the plaintiffs, finding education to be afundamental right and property wealth per pupil to be a suspect class. Accordingly, the district courtruled that the Texas school finance system violated the equal protection clause of the U.S.Constitution and ordered the legislature to design a constitutional system.

The case was immediately appealed to the U.S. Supreme Court. In March 1973, in a 5-4decision, the U.S. Supreme Court held that the Texas school finance system did not violate the U.S.Constitution. The majority held that while education was important preparation for citizenship inthe U.S., it was not mentioned in the Constitution. The majority also held that property wealth perpupil was not a suspect class because it described governmental units and not individuals.Accordingly, in the absence of a finding of discrimination based either on suspect classifications(e.g., race, gender, national origin) or on the impairment of a fundamental right (i.e., a rightexpressly or implicitly guaranteed by the U.S. Constitution), the Court invoked the relative lenientrational relationship test. The state successfully responded that its school finance system was relatedto the principle of local control.

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182Robinson v. Cahill, 62 N.J. 473, 303 A.2d 273 (1973)

183Id., at 63 N.J. 510.

184The education article of a state constitution may also be invoked by “indirect application,” through argumentsthat the article’s language establishes education as a fundamental right with equal protection guarantees requiring strictscrutiny analysis.

185See Odden and Picus, supra.


The Rodriguez decision effectively eliminated the U.S. Constitution as a vehicle for publicschool finance reform and returned this litigation to state courts. As noted by the Rodriguezmajority, most state constitutions not only mention education but have clauses explicitly assigningresponsibility for providing access to free, public education. School finance reform litigation wouldnow proceed state by state on the basis of state equal protection clauses and state education clauses.

School Finance Challenges in State CourtsJust one month after the Rodriquez decision, the New Jersey Supreme Court decided Robinson

v. Cahill.182 While acknowledging that education is mentioned in the New Jersey constitution, thecourt held it is not a fundamental right. Further, while recognizing the existence of wealth-relatedper pupil spending disparities across local districts, the court held that property wealth per pupil wasnot a suspect class. Accordingly, the court found that the New Jersey school finance system did notviolate the New Jersey equal protection clause.

However, the court did overturn the New Jersey school finance system on the basis of the stateconstitution’s education article, which requires the legislature to “provide for the maintenance andsupport of a thorough and efficient system of free public schools.” Construing the education articleas a guarantee for all children of “that educational opportunity…needed in the contemporary settingto equip a child for his role as a citizen and as a competitor in the labor market” , the court ruled that“the state must meet that obligation itself or if it chooses to enlist local government it must do so interms which will fulfill that obligation”183 The court concluded the constitutional guarantee had notbeen met because of the fiscal disparities across school districts.

Robinson was important for three reasons. First, it kept school finance litigation alive afterRodriguez. Second, it established a precedent for challenging school finance systems through the“direct application” of state education articles, a substantively different approach than making anequal protection challenge.184 Third, the case foreshadowed subsequent challenges that came to beknown as “adequacy” litigation. These cases expanded the notion of school finance equity beyondfinance to the breadth and depth of educational programs provided to all children. Specifically, akey question for the courts in adequacy cases is whether all children have an opportunity to achieveat high levels185

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186Pauley v. Kelley, 162 W.Va. 672, 255 S.E.2d 859 (1979).

187Rose v. Council for Better Education, Inc., 790 S.W.2d 186 (1989).

188Further, in a somewhat unusual turn, the court compared Kentucky’s elementary and secondary educationsystem with national and neighboring norms in terms of fiscal performance and student achievement, finding Kentuckysubstandard in both instances.


A notable direct application of a state education article and a forerunner of the concept ofeducational “adequacy” as articulated in prominent cases in the 1990s is Pauley v. Kelley,186 inwhich the West Virginia Supreme Court of Appeals considered the constitutional provision that “theLegislature shall provide, by general law, for a thorough and efficient system of free schools.” Thecourt held that, under equal protection guarantees, any discriminatory classification in state'seducational financing system cannot stand unless state can demonstrate some compelling stateinterest to justify the unequal classification, and that the “thorough and efficient” clause containedin West Virginia Constitution requires that the state legislature develop certain high qualitystatewide educational standards; if these values are not being met it must be ascertained that failureis not a result of inefficiency and failure to follow existing school systems. The high court remandedthe case to the circuit court with orders to develop “thorough and efficient” education standards.

This case is noteworthy for the detail of the standards (or “Master Plan”) thus developed,including requirements for curriculum, personnel, facilities, and equipment for all school programs,along with the resources needed to meet those standards. The circuit court found the existingsystems “woefully inadequate” by comparison and invalidated both the state school finance systemand state procedures regarding local property tax assessments. It was not until 1997, however, thata court ordered the state to fully fund the plan.

The adequacy approach to interpreting state education clause requirements matured in the1990s, with notable cases including Kentucky, Massachusetts, Alabama, and New Jersey. In Rosev. Council for Better Education, Inc.187, the Kentucky Supreme Court considered in 1989 whetherthe Kentucky General Assembly has complied with its constitutional mandate to “provide anefficient system of common schools throughout the state” Upon reviewing the evidence, the highcourt concluded that Kentucky’s wide variation in fiscal and educational resources resulted inunequal educational opportunities across local districts. Noting large interdistrict variances in bothper-pupil property wealth and curricula, the court also cited resource-related disparities in pupilachievement test scores and expert opinion presented at trial that clearly established a positivecorrelation between such test scores and district wealth.188

Guaranteed Tax Base ProgramsGuaranteed tax base (GTB) programs were introduced in the early 1970s in response to school

finance litigation in California. Like the foundation program, a GTB program is designed to remedythe basic structural flaw in the traditional approach to the local financing of public schools; namely,the unequal distribution of property wealth across local school districts. A GTB program guarantees

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189The Kalkaska School District in Michigan closed its doors in mid-March of 1993 after local voters defeateda millage renewal. This early school closing, which received national attention, was a critical factor in Michigan’sabandonment of GTB and adoption of its current foundation funding system the following year. For a full account andanalysis, see Addonizio, Kearney, and Prince supra.


every local district a minimum per pupil revenue yield for each mill of tax effort. Put another way,a district’s per pupil revenue level depends entirely upon its tax effort and not at all upon its taxbase, because each district is guaranteed, through state aid grants, the equivalent of a state-designated property tax base.

Guaranteed tax base programs were first enacted in the early 1970s, at the same time of the firstsuccessful judicial challenges of state school finance systems. The object of these challenges wasthe relationship between school revenue and property wealth, stemming from the unequaldistribution of local per pupil property wealth. In effect, GTB systems, also known as district powerequalizing, guaranteed yield or equal yield systems, seek to guarantee all local districts equal accessto school revenue through the local property tax.

In a GTB system, state aid varies inversely with local property wealth per pupil and directly withlocal tax effort. Districts can raise revenue in exactly the same manner as if they have a local taxbase equal to the GTB. Further, unlike the foundation program which assigns determination of thetax rate to the state, the GTB program reserves that important decision to the local district voters.Thus, once local voters determine their desired per pupil spending level, they simply divide thatfigure by the GTB to determine their local tax rate. Then, they can multiply their local per pupilproperty wealth by their tax rate to determine their local share of school funding. For example,assume a local district in a state with a GTB program has per pupil property wealth in the amountof $60,000 and a preferred spending level of $6,000 per pupil and that the state’s GTB is $120,000.The district’s required tax rate would be 6,000/120,000 = 0.05; that is, 5 percent or 50 mills. Theirlocal per pupil contribution would be $60,000 x .05 = $3,000 and their per pupil GTB aid would be$(120,000 – 60,000) x .05 = $3,000.

Another important feature of GTB is that both local revenue and state aid increase with increasesin the local tax rate. That is, the GTB is a matching grant formula, with a district’s matching rateinversely proportional to its per pupil tax base. In the example above, the local district’s matchingrate is 1.0. That is, for each local dollar raised for schools, the state will contribute one dollar. Inthe jargon of public finance, the local marginal tax price of a one dollar increase in per pupilspending in this example is fifty cents. Matching formulas, therefore, create an incentive forincreasing expenditures on the supported service. This local discretion as to school spending leveland the occasional unpredictability of local voter response to the GTB incentive have led manystates to reject this funding program.189

The key question for a state with GTB program is the selection of the per pupil tax baselevel that the state will guarantee. The ideal level would be, of course, the level enjoyed by the mostproperty rich school district. However, while this would ensure all districts access to the sameeffective tax base, it is prohibitively expensive. On the other hand, a low tax base guarantee (say,the statewide tax base per pupil) would leave all districts of above-average per pupil taxable wealth

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190Odden and Picus, supra.

191Id.


with a fiscal advantage over all the rest. That is, at the same tax rate, these “out-of-formula” districtswould be able to raise more per pupil revenue through their local property tax than the “in-formula”districts could raise through a combination of local property tax revenue and state GTB aid. Theexistence of such “out-of-formula” districts is contrary to the purpose of GTB, which seeks to offsetschool spending differences that stem from differences in local taxable wealth.

While there are no absolute standards with which states establish their GTB guarantee levels,Odden and Picus point to several possible benchmarks.190 In states that have defended courtchallenges to their school finance systems, guarantee levels have been set from the 75th to the 90th

percentile of students. A subsidiary issue for GTB states is whether to impose a limit on either thetax rate to be equalized or the local rate, or both. Under the former limit, state GTB aid would bepaid up to the designated maximum rate and any local millage levied in excess of that rate wouldraise only local revenue. The principal weakness of this approach, of course, is that the unequalizedportion of the revenue structure could swamp the equalizing effects of the GTB formula. Thesecond type of limit is imposed on the local tax rate, resulting in a cap on per pupil expenditures. While such a limit would detract from local control, it would also limit variation across districts inper pupil expenditures. Kentucky’s 1990 school finance reforms included both of these reforms.

Although the GTB formula is designed with mathematical precision to equalize the tax basesavailable to local districts, two problems arise with this program. First, as mentioned above, statesgenerally cannot afford to equalize all districts up to the level of the most property-richcommunities. Second, even for those districts within reach of the formula, GTB programs often failto eliminate the link between local school spending and local property wealth. That is, among GTBrecipients, those with higher income and property wealth tend to levy higher local school tax ratesthan their less wealthy counterparts; wealthier voters tend to be more responsive to the price effectsof the GTB formula, electing to purchase more of the subsidized good.

Combining Foundation and GTB ProgramsSome states combine foundation and GTB programs in an effort to ensure both an adequate

funding level in every district and some measure of local discretion about school spending. Thesecombination programs can be viewed as two-tiered, with the first tier consisting of a foundationprogram and a state-mandated tax and the second tier a GTB program providing local district voterswith the option of levying equalized millage in excess of the state mandate.

Missouri has had such a two-tiered program since 1977.191 In that year, the legislature placeda GTB program on top of their pre-existing foundation formula. In 1993, the legislature set thefoundation level at just below the previous year’s statewide average expenditure per pupil and theGTB level at the per pupil property wealth of the district at the 95th percentile on that measure.

Combination formulas were also adopted in response to two widely-heralded and successfuljudicial challenges to school funding system in Texas and Kentucky. In Texas, the 1989-90

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192Id.

193Id.

194Id.


foundation program provided all districts with base per pupil revenue equal to 42 percent of the stateaverage per pupil revenue.192 This relatively low foundation was supplemented by a GTB programthat guaranteed every district an effective per pupil tax base just below the statewide average.However, the state limited this guarantee to 3.6 mills over the required foundation tax rate. Districtswere also allowed to levy unequalized local millage in excess of this limit.

The Kentucky legislature established a foundation base for 1989-90 equal to about 77 percentof the statewide average.193 The legislature also placed a GTB program on top of this foundation,with a guarantee of approximately 150 percent of the state average. Kentucky’s GTB programincluded two tiers, each with a tax rate limit. The first tier limited local districts to a 15 percentincrease over the foundation level in revenue per pupil in combined local tax revenue and GTB aid.The second tier allowed local voters to raise up to an additional 15 percent of the foundation levelthrough additional but unequalized millage. Put another way, Kentucky limited local revenue perpupil to 30 percent over the foundation level, with half of this “excess” revenue available throughequalized millage.

This combination approach provides a means to meet a state objective of ensuring minimallyadequate per pupil spending in all districts while allowing some measure of local discretion aboutspending above the foundation levelthrough an equalized local tax. Such local discretion allowsdistricts to respond not only to local preferences regarding educational programs, which generallyvary across localities, but also to differences in the price of educational resources, including teachersalaries. Such prices are generally higher in urban districts.

Adjustments to Basic Funding LevelsOdden and Picus cite four types of adjustments that states could reasonably be expected to make

to their base per pupil allocations: special pupil needs (e.g., children from poor families, childrenwith physical or mental disabilities, or children with limited English proficiency); education level(elementary and secondary); economies and diseconomies of scale; and price differences, notedabove.194 Of these adjustments, the matter of special pupil needs is arguably the most important andhas received far more attention by policymakers than the other issues. The attention stems from theuneven distribution of special needs children across local districts. For example, children fromhouseholds with incomes below the poverty level tend to be concentrated in large, urban districtsand small, generally rural districts. Such districts are also home to concentrations of students fromwhom English is not the primary language.

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195H. Levin, “The Economics of Education for At-Risk Students, “ in Essays in the Economics of Education,E. Hoffman, ed. (Kalamazoo, Mich.: W.E. Upjohn Institute for Employment Research, 34-73.

196For a more complete discussion of SEEK, see J.E. Adams and W.E. White, “The Equity Consequence ofSchool Finance Reform in Kentucky,” Educational Evaluation and Policy Analysis 19 (1997): 165-184.


Children raised in poverty and children with limited English proficiency have much greaterthan average risk of not graduating from high school.195 Accordingly, such students require varioustypes of supplemental educational services. Like regular education services, the cost ofsupplemental services varies considerably across local districts. Large urban districts generally facehigher prices for these services while serving larger concentrations of special needs students. At thesame time, such districts are generally property-poor as compared with statewide averages.Consequently, most states and the federal government recognize a responsibility to assist districtsin financing these supplementary programs. Such aid, however, is small in comparison to generalschool revenue and is distributed to local districts according to the numbers of special needs pupilsand not local taxable wealth.

NOTABLE STATE SCHOOL FINANCE REFORMSThe foregoing analysis addresses the goals of state school finance systems and the mechanisms

designed to achieve them. This section will examine finance reforms in four notable reform states:Kentucky, Texas, Michigan and Vermont. These states addressed issues of taxation and educationalfunding with bold remedies, some in response to adverse judicial decisions and others in responseto political pressures.

(1) Kentucky. In 1989, as noted above, the Kentucky Supreme Court ruled that the state’s entireelementary and secondary public school system was unconstitutional (Rose v Council for BasicEducation, Inc., 790 S.W. 2nd 186 (Ky. 1989)). This landmark decision resulted from an earlier andmore limited school finance case in which plaintiffs challenged the constitutionality of the Kentuckyfunding formula on grounds that it was inequitable and therefore in violation of the education clauseof the state constitution, which requires that school funding be “efficient.” The district court foundfor the plaintiffs. On appeal, the Supreme Court expanded the scope of the decision to include notonly school finance but the entire public education system and directed the legislature to recreatethe entire education structure, including school governance, finance and curriculum.

The finance reform, known as Support Educational Excellence in Kentucky (SEEK), consistsof four parts: an “adjusted base guarantee” (ABG), a required local tax effort, and two “tiers” whichallow local districts to supplement their basic guarantee through a combination of state and localrevenue.196 The ABG provides local districts with a foundation payment for each student. This baserevenue level is set by the General Assembly and is constant across all districts. The base is thenadjusted by four factors associated with the costs of special services: services for exceptionalchildren, services for educationally at-risk children (generally, low-income), pupil transportation andhome and hospital instruction. The minimum local tax effort required for the ABG grant is 30 centsper $100 of assessed valuation. Tier I provides local districts with an option to supplement their

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197In 1996-97, 161 of Kentucky’s 176 school districts participated in Tier I at the maximum level, while theremaining 15 participated to some degree. In addition, 161 districts participated in Tier II to some extent. Office ofEducational Accountability, 1997 Annual Report (Frankfort, Ky.: Kentucky General Assembly, 1997).

198J.E. Adams, “Kentucky: A Decade Since Rose,” in The Political Economy of Education: The State of theStates and Provinces 1999, B. Brendt., ed. (Rochester, N.Y.: University of Rochester, 1999), 77-82.

199This section draws on C. Clark, “Introduction to Texas School Finance,” in The Political Economy ofEducation: The State of the States and Provinces 1999, B. Brent, ed. (Rochester, N.Y.: University of Rochester, 1999),197-202.

200Edgewood Independent School District v. Kirby, 777 S.W. 2d 391 (Tex. 1989); Edgewood v. Meno, 917 S.W.2d 717 (Tex. 1995).


ABGs by a maximum of 15 percent. School boards may levy taxes and the state matches this localeffort with equalization aid for districts with property wealth per pupil below 150 percent of the stateaverage. Tier II allows school districts to raise up to 30 percent of combined ABG and Tier Irevenue. Local levies permitted under Tier II must be voted by the local electorate and are notequalized by the state.197

Kentucky’s Office of Education Accountability reports that total state and local support for K-12education rose from about $2 billion in 1989-90 to $3.4 billion in 1997-98, an increase of 70 percent.Per pupil revenue rose from $3,161 to $5,306 over this period, an increase of nearly 68 percent. Atthe same time, school funding has become more equitable, with the difference between mean per-pupil revenues in the highest and lowest quintiles falling from $1,516 in 1989-90 to $209 in 1997-98, a decrease of 86 percent. Similarly, the coefficient of variation fell from 0.193 in 1989-90 to0.090 in 1996-97, indicating that two-thirds of all pupils in Kentucky were within 9 percent of thestatewide average per pupil revenue.198

(2) Texas.199 Public school funding in Texas has been shaped by a series of lawsuits filed in thestate courts over the 1985 to 1995 period.200 At issue in this litigation was the heavy reliance onlocal property taxes to fund public schools and the great disparity in property values across the state.These wealth disparities had to be neutralized by the state in order to provide local districts withequal access to school revenue. The litigation prompted the Texas legislature to pass a system ofaid formulas that comprise the Foundation School Program (FSP). The FSP equalizes funding forpublic education in Texas by supplementing local school revenue with state aid and by limitingschool funding in very wealthy districts. As such, the FSP provides substantially equal revenue perpupil at equal local tax rates.

Tier 1, or the foundation, of the FSP provides each local district with a “basic allotment” thatis then adjusted to reflect differences in costs and educational needs. State aid under Tier 1 isinversely related to local property wealth per student. The resulting combination of state and localfunds provides local districts with equal levels of educational resources for equal tax effort. Toparticipate in this program, local districts are required to levy a “Local Fund Assignment” tax rateof $0.86 per $100 of property value.

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201Milliken v. Green, 389 Mich. 1, 203 N.W. 2d 457 (1972), opinion vacated by 390 Mich. 389, 212 N.W.2d 711(1973).


Tier 2 provides equalization funds to local districts in excess of the base funding level of Tier1. Unlike Tier 1, participation in this program is discretionary. Districts may levy up to $0.64 oftax per $100 of property value and will be guaranteed $21 per student for each penny of tax rate incombined state and local funds. Districts with per student property wealth in excess of $210,000will receive no state aid.

A third part of the funding structure provides for so-called “wealth sharing.” Specifically,districts with property values greater than $280,000 per pupil are required by Chapter 41 of theTexas Education Code to reduce their wealth by one of five wealth sharing options. These optionsinclude school district consolidation, detachment of property and annexation of that property to alow-wealth district, purchase of attendance credits from the state, contracting for the education ofstudents in another school district, and consolidation with lower wealth districts. Of the 93 districtssubject to the Chapter 41 wealth sharing provisions in 1998-99, all chose either the purchase ofattendance credits or contracting for the education of nonresident school districts. These measures,commonly referred to as “Robin Hood” requirements, have combined with Tiers 1 and 2 tomeasurably improve the equity of public school funding in Texas.

(3) Michigan. Prior to 1973-74, Michigan distributed general aid to local schools through afoundation aid system that guaranteed a minimum expenditure per pupil in every local district.However, by 1973, Michigan’s highest-spending district tripled the per-pupil expenditures of thestate’s poorest district. Facing disparities of this magnitude, along with a court challenge of theconstitutionality of Michigan’s aid system,201 the legislature replaced the foundation formula witha guaranteed tax base (GTB) formula, effective for the 1973-74 fiscal year. In that first year, morethan 90 percent of Michigan’s school districts received GTB aid. By 1993-94, however, thispercentage had fallen to approximately two-thirds and the ratio of per student spending between thehighest- and lowest-spending districts had risen to the levels of the early 1970s. Further, propertytax rates had risen to unacceptably high levels for many residents and 122 districts were within fourmills of the state’s constitutional 50-mill limit.

Voter ambivalence toward Michigan’s property tax and school funding systems was reflectedin a string of 12 consecutive failed statewide ballot proposals spanning more than a decade in the1980s and early 1990s. Then, in late July of 1993, in a stunning development, the Michiganlegislature eliminated the local property tax as a source of operating revenue for the public schools,thereby lowering K-12 operating revenue by more than $6.5 billion. In March of 1994, Michiganvoters approved a constitutional amendment (Proposal A) increasing the state sales tax from 4 to 6percent. In addition, the state’s flat rate income tax was lowered from 4.6 to 4.4 percent, thecigarette tax was raised from 25 to 75 cents per pack, and a per-parcel cap on assessment growth wasset at the lesser of inflation or five percent (reassessed at 50 percent of market value on sale).Property taxes for school operations were restored at dramatically lower levels than before – to sixmills on homestead property and 24 mills on non-homestead property in most districts.

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202For a detailed analysis of the Michigan foundation program and related reforms, see M. Addonizio, C.P.Kearney, and H.J. Prince, “Michigan’s High Wire Act,” Journal of Education Finance 20 (Winter 1995): 235-269.

203M. Addonizio, “You Can’t Always Get What You Want: Property Tax Relief and School Funding inMichigan,” in The Political Economy of Education: The State of the States and Provinces 1999, B. Brendt., ed.(Rochester, N.Y.: University of Rochester, 1999), 111-116.

204See, e.g., T. Downes, “Evaluating the Impact of School Tax Reform on the Provision of Public Education:The California Case,” National Tax Journal 45 (December 1992, 405-419.

205Brigham v. State of Vermont, 166 Vt. 246, 629 A.2d 384 (1997).


On the allocation side, new legislation returned Michigan from a GTB formula to a foundationprogram as the core of state school funding. A district’s 1993-94 combined state and local operatingrevenue per pupil (primarily local property taxes, state aid and most categorical aid) formed the basisfor determining its 1994-95 foundation allowance. The legislation provided that every district havea foundation of at least $4,200 per pupil. In addition to establishing a minimum (local) foundationallowance, the legislation set a state basic foundation allowance at $5,000 per pupil for 1994-95.This allowance is changed annually through application of revenue growth and enrollment growthindices. Districts spending more that the state foundation will receive per-pupil revenue increasesequal to the annual dollar increase in the basic foundation allowance, while districts spending lessthan the basic allowance will receive increases up to twice that amount. Thus, this basic allowance,which rose to $5,153 in 1995-96, $5,308, $5,462 in 1997-98 and 1998-99 and $5,696 in 1999-00,will constrain per pupil spending growth in more districts each year and exert a “range preserving”effect on interdistrict spending disparities.202

Michigan’s school finance reforms were intended to achieve four objectives: (1) substantiallyreduce property taxes; (2) increase the state share of total K-12 revenue; (3) reduce interdistrictdisparities in per-pupil revenue; and( 4) assure all local districts a minimum level of resources withwhich to meet state and local education standards. It appears that the first two objectives have beenaccomplished. Proposal A reduced total property taxes by about 26 percent. For homeowners, thereduction is about 32 percent, while the cut for businesses is about 13 percent. Further, the stateshare of K-12 revenue has risen from about 45 percent in 1993-94 to over 80 percent in 1999-2000.Measurable progress has also been made toward objective three.203

Progress toward objective four, however, is more problematic. While the reforms establishedminimum funding levels for local districts and substantially increased aggregate K-12 revenue in1994-95, including proportionately large increases for low-spending districts, aggregate revenuegrowth has slowed since then. With new constraints on local revenue growth and a greater relianceon more income-elastic revenue sources, overall real spending levels could fall during a recession.Centralization and equalization of public school funding along the lines of the Michigan reformshave led to slower revenue growth in other states.204

(4) Vermont. In February 1997, the Vermont State Supreme Court unanimously ruled that thestate’s school finance system was unconstitutional.205 Prior to the ruling, Vermont’s public school

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206W.J. Mathis, “The State of the State: Vermont’s Act 60 Finance Reform,” in The Political Economy ofEducation: The State of the States and Provinces 1999, B. Brendt., ed. (Rochester, N.Y.: University of Rochester, 1999),209-212.

207This section is based, in part, on a more complete discussion in K. Alexander and R.G. Salmon, Public SchoolFinance (Needham Heights, Mass.: Allyn and Bacon, 1995).


finance system was characterized by large disparities in local tax burdens and per pupilexpenditures. Local school tax rates ranged from $0.02 to $2.40 per $100 valuation, while per pupilspending varied from $2,961 to $7,726. The court held that state's system of financing publiceducation did not satisfy requirements of education clause and the common benefits clause ofVermont Constitution; these clauses, said the supreme court, require the state to ensure substantial,rather than absolute equality of educational opportunity throughout Vermont. Equal per pupilfunding, the court ruled, was neither a constitutional requirement nor a desired policy goal. Rather,the court held that a constitutional funding system required that educational opportunity not be afunction of local wealth.

In response to this ruling, the legislature passed Act 60, which established a two-tiered fundingformula consisting of a foundation program at its base and a guaranteed tax base (GTB) programas a supplement. The foundation level was set at $5,010 per pupil and indexed to the cost ofgovernment goods and services, while the GTB was set for FY 2000 at $40 per pupil for each 1 centincrease per $100 valuation in the local property tax. The program is funded by a new statewideproperty tax set at $1.11 per $100 valuation in FY 1999. The system includes a controversialredistributive mechanism, or “recapture” provision, whereby property-rich towns that generate localrevenues in excess of either the foundation level with the statewide tax or the GTB level with thelocal tax pay these excess funds to the state. These funds are then redistributed to districts statewide.Both the tax and expenditure features of the new system have been roundly criticized by residentsof property-rich districts, some of whom have experienced a doubling or tripling of their schooltaxes while facing lower growth in per pupil revenue.206

FINANCING CAPITAL PROJECTS207

Local school districts are generally unable to finance the construction of new facilities,renovation of older buildings or the acquisition of large equipment (e.g., buses, technology) fromoperating revenue. Rather, they need authority to sell bonds to spread payments over a long period.At the same time, states regulate such borrowing to ensure the responsible use of this debt andprevent defaults or large, long-term deficits.

While most states provide modest financial assistance to their local districts for capital projects,most long-term debt is repaid with local property tax revenue. Consequently, the quality of publicschool facilities often depends upon local district fiscal capacity, precisely the equity problemaddressed in Serrano and other cases with respect to school operating revenues. State responses tothis equity issue, have been decidedly less substantial regarding capital outlay. As Alexander andSalmon have observed: “The problems of providing modern school plants, not only in the ghetto

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208Id., at 335.

209K. F. Jordan, M. McKeown, R. D. Web, School Business Administration (Newbury Park, Calif.: CorwinPress, 1985), 272-278.

210K. Alexander and R.G. Salmon, supra, at 337.


areas of cities but also in many rural and metropolitan area school districts, cannot be resolved untilappropriate new designs, provisions, and procedures for financial support are developed andimplemented.”208

Although states have adopted a variety of state capital-outlay and debt-service-assistanceprograms, the tradition of local financing of public school facilities continues in most states today.Given the limited funds available from state-supported capital-outlay and debt-service programs,local districts rely on one or more of the following three options:

(1) Current revenues. Some very large or very affluent school districts are able to finance schoolconstruction projects on a “pay-as-you-go” basis. By this method, the entire cost of a project isaccrued from the revenues of one fiscal year’s local tax levy. This method is ideal because iteliminates costs associated with interest payments, bond attorney fees, and local tax elections. Twodisadvantages are the failure to distribute capital costs over those future generations that will benefitfrom the facility and the failure to capitalize on lower real borrowing costs during periods ofinflation. In any event, few local districts are able to finance large capital projects with currentrevenues.

(2) Building Reserve Funds. Some states permit local districts to accumulate tax revenues forthe purpose of funding the construction of future school facilities. These building reserve funds arekept separate from current operating revenues and are generally raised through earmarked tax levies.In most cases, state laws limit the investment of these revenues to low-risk, low-yield options.Building reserve funds enable a local district to undertake a capital project without the delays andcosts associated with obtaining voter approval for the sale of the bonds. In addition, debt servicecosts are avoided as are local restrictions on tax or debt limitations.209 Such funds are used byseveral states but raise a relatively insignificant proportion of K-12 capital funding.210

(3) General Obligation Bonds. The vast majority of public school facilities is financed throughthe sale of general obligation bonds. School bonds, along with other municipal bonds, are legalinstruments sold by the borrower as evidence of debt, which specify interest rates, paymentschedules, and security. Municipal bonds are exempt from the federal personal income tax and thepersonal income tax in most states, making them particularly attractive for investors facing highmarginal income tax rates.

Municipal bonds are a relatively low-risk investment. Moreover, general obligation bonds (onetype of municipal bond) are secured by the full faith, credit and taxing authority of the issuer. Assuch, general obligation bonds are usually considered the most secure of the municipal bonds.

Constraints imposed on the issuance of general obligation bonds vary considerably across thestates and, in some cases, across local school districts within states. Most states limit local school

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211Public School Finance Programs of the United States and Canada, Steven D. Gold, David M. Smith and Stephen B. Lawton, eds. (Albany, NY: American Education Finance Association and Center for the Study of the States,The Nelson A. Rockefeller Institute of Government, State University of New York, 1995), 48-52.

212Id.


district debt, a constraint that is particularly troublesome for property-poor districts. States alsoimpose various requirements on local districts seeking approval of the sale of general obligationbonds. Some states require a simple majority of those voting at referendum, while others requirea supermajority.

State Options for Capital Expenditure Financing By 1993-94, 35 states provided financial support to local districts for capital expenditures.211

This support was provided through one of the following mechanisms: (1) complete state support;(2) grants-in-aid; (3) loans; or (4) building authorities. Each is discussed briefly below.

(1) Complete State Support. Under this option, the funding of all capital and debt-serviceexpenditures of the public schools is borne entirely by the state. One obvious advantage of thisapproach is statewide fiscal equalization across local districts of varying property wealth. Further,states generally have access to a greater variety and level of resources than do local units ofgovernment and face lower borrowing costs. Such programs, however, are rare. In 1993-94,complete-state-support programs were operating in Alaska, California, and Hawaii.212

(2) Grants-in-aid. Such grants generally take one of three forms. Equalization grants aredesigned to allocate aid in inverse relation to local district property wealth per pupil. This approach,which is widely used by states to distribute operating revenue to local school districts, allows localdistricts to finance school facilities of comparable quality despite variations in local taxable wealth.Further, these grants require some local contribution, creating an incentive for greater efficiency incapital spending. Percentage-matching grants provide a fixed percentage of state support for eachlocal capital project. Unlike equalization grants, these grants do not vary with local fiscal capacity.This approach is viewed by critics as overly burdensome to property-poor districts where voters mayneed to levy high local tax rates in order to obtain the required local matching funds. Consequently,states have abandoned this approach, with its last proponent, Delaware, changing to an equalizationapproach in 1992. Flat grants provide local districts with a fixed amount of revenue for each state-approved capital project or each pupil. In either case, this approach shares with percentage-equalizing grants the drawback of ignoring local district fiscal capacity. The adverse consequencesbecome greater, of course, when the flat grant aid is a small proportion of total capital spending.

(3) Loans. Some states have established one or more funds, often through the use of earmarkedrevenues, with which to provide low-interest loans to local districts. In most cases, these loanprograms do not consider the relative fiscal capacities of local districts and thus, do not achieve anysignificant degree of fiscal equalization.

(4) Building Authorities. Public school building authorities are agencies established by the stateto allow local districts to circumvent restrictive tax or debt limitations otherwise imposed on local

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213G.I. Earthman, “Facility Planning and Management,” in Principles of School Business Management (Reston,Va.: Association of School Business Officials International, 1986), 611-649.

214G.I. Earthman and J. Bailey, “The Politics of Site Selection,” CEFP Journal 13, No. 5 (October 1975): 4-8.

215G.I. Earthman, supra.

216Id.


governments. Since these authorities are separate government agencies and do not operate schools,tax or debt limitations for the school district are thereby averted. Not all states permit the use ofbuilding authorities to construct school facilities. Often, local school districts can use buildingauthorities without obtaining local voter approval. These authorities, however, generally suffer thedisadvantage of using revenue bonds to finance capital projects, thereby incurring higher interestcosts as compared with the interest costs of more secure general-obligation bonds.

Site Selection and Acquisition Acquiring a proper site for a school is a critically important public service. However, obtaining

good sites for schools is becoming increasingly difficult.213 Problems in site acquisition includecompetition for sites with the commercial sector; the increase in site size to accommodate awidening range of educational programs; the rise in land prices; and, in urban areas, the scarcity ofopen land. As a result, education planners now must consider less than optimal sites. Further, whilecommunities want a new school when enrollments rise sufficiently, no one wants a new schoollocated next to their property. Reasons include noise and congestion and the perception that anadjacent school site will lower property values.

The selection of a school site is one of the most controversial issues involved in planning a newschool. Consequently, some local school officials choose not to involve members of the communityin the site selection process. This is particularly true in large districts, where local school politicscan be particularly contentious. In a survey of the ten largest school districts in the country,respondents in a majority of the districts indicated they do not include local residents in the locationdecision for fear that disagreements could delay or prevent site acquisition.214 Resort to such a closeddecision-making process, however, is not universal. Many local districts, as a matter of policy,involve community members in the site selection process. Participants in this process analyze dataand information from several sources, including regional, urban or community land use maps, aerialphotographs, re-development authority maps, and a tour of the areas to be served by the newschool.215.

The final criterion for school site selection is political acceptability. In more heavily populatedareas, a school site is usually designated well in advance of need by the local governing body inaccordance with their long-range development plan. Such a plan generally addresses the placementof all important community resources, including schools, recreation areas, parks, libraries and otheramenities intended to serve the entire community.216

Impact Fees

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217See the discussion of state impact fee enabling statutes preceding Section 8-602 (Development Impact Fees)of the Legislative Guidebook. See generally C.L. Siemon and M.J. Zimet, “School Funding in the 1990s: Impact Feesor Bake Sales,” Land Use Law and Zoning Digest 44, No. 7 (July 1992): 3-9.


Local governments across the U.S. have adopted various forms of impact or developer chargesas a means of financing the timely installation of public facilities, including public schools. Thesecharges imposed as a condition of development approval include impact fees, special assessments,development agreements, user fees and connection fees. Impact fees are imposed on developers toensure sufficient funding for those capital services and facilities needed to support the newdevelopment. Such public services and facilities include roads, parks, police, fire, sewer, water,libraries, and schools. Some states expressly authorize impact fees for schools.217

CONCLUSIONLocal school districts across the U.S. vary enormously in income and property wealth. Fueled

in large part by local land use decisions and other economic development measures designed toattract investments, these local fiscal disparities pose a challenge to education policymakers andothers who seek equal educational opportunities for our children. Such opportunities can arise onlythrough the workings of state school finance structures that effectively neutralize the oftensubstantial differences in local school district fiscal capacity. The structures have been shaped, inlarge part, by judicial decisions about states’ constitutional responsibilities for funding publicschools.

Following the landmark U.S. Supreme Court decision in San Antonio Independent SchoolDistrict v. Rodriguez, which effectively closed the door on education finance equity litigation in thefederal courts, reform advocates have turned to state courts and legislatures to pursue equity andadequacy in public school finance. These reforms seek to neutralize differences in property wealthacross local communities. Without such state intervention, children fortunate enough to live inwealthy enclaves will have access to a rich array of educational resources while those in poorcommunities will face relatively meager school programs. In view of the importance attached toeducation in preparing our children for participation in public and economic life, such a situationseems unfair and undemocratic.

In response to these concerns, states have adopted school funding structures designed to offsetdifferences in local property wealth. These structures, which are much more prominent in thefunding of school operations than school construction and rehabilitation, provide state school aidin inverse proportion to local taxable wealth. Guaranteed tax base (GTB) and conceptuallyequivalent district power equalizing programs allow local voters to determine their tax and schoolspending levels and seek to assure local districts equal revenue per pupil for equal tax effort. Incontrast, foundation programs limit local voters’ ability to exceed those rates. Some states employa combination of these two approaches.

While these state initiatives have succeeded in measurably improving the equity of schoolfunding across the states, funding disparities remain as local economic development proceedsunevenly across communities. As long as local governments vary in their abilities to attract high

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value commercial, industrial and residential investment, their capacities to support public educationsystems will vary as well. As a result, the task of achieving equal educational opportunity for ourchildren will remain a responsibility of the states.

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